China economy: has the service sector improved enough to start scaling back stimulus?

Key gauge of sentiment among smaller, private-sector firms dashed expectations for a slight decline and rose sharply to the second-highest level since April 2010

The data fits well with the government’s narrative that its supportive policies for small businesses are starting to work to support a strong, broad-based recovery

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China’s Caixin/Markit services purchasing managers’ index (PMI), a gauge of sentiment among smaller, private firms, rose to 57.8 in November from 56.8 in October. Photo: Bloomberg

Published: 8:30pm, 3 Dec 2020Updated: 10:40pm, 3 Dec 2020

Better-than-expected Chinese service sector sentiment data for November has strengthened market confidence in the outlook for the country’s economic recovery and, in turn, fuelled discussions over how soon policymakers should start to scale back their stimulus policies, analysts said.

The country’s tens of millions of small service providers, particularly vulnerable to the coronavirus lockdowns implemented to fight the pandemic and rebounding more slowly than large and state-owned firms, had previously been regarded a weak link in China’s economic recovery, and a reason for continued accommodative government policies.

But on Thursday, the Caixin/Markit services purchasing managers’ index (PMI) – a gauge of sentiment among smaller, private-sector firms – dashed market expectations for a slight decline and rose sharply to the second-highest level since April 2010, triggering optimism over the outlook for the service sector, overall consumer spending and economic growth momentum.

The rise to 57.8 in November from 56.8 in October followed the release of the official non-manufacturing PMI, which measures sentiment in the service and construction sectors but for larger, state-owned firms, on Monday. That also rose to 56.4, above October’s reading of 56.2, to highest reading since June 2012. A reading above 50.0 indicates growth in sector activity, while a reading below represents contraction.

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The data fits well with the government’s narrative that its supportive policies for small businesses – from access to low-cost lending, to tax and rent cuts and coupon schemes to boost consumer spending – are starting to work, and the consumption side will catch up with production, which was first to rebound, resulting in a strong, broad-based recovery.