China's services activity growth hits 9-month low in June, shows Caixin PMI

China's services activity expanded at its slowest pace in nine months in June, with the Caixin/S&P Global services PMI falling to 50.6 from 51.1, reflecting weakening demand and a significant decline in new export orders, the fastest contraction since December 2022. This slowdown, which aligns with official data, highlights persistent issues including insufficient effective domestic demand, deepening deflationary pressures, and the ongoing property crisis. The sector also saw cautious hiring and the steepest decline in output charges in over three years, indicating intense market competition and a challenging external environment.

Analysis

China's services sector activity decelerated to a nine-month low in June, with the Caixin/S&P Global services PMI falling to 50.6 from 51.1 in May. This slowdown, while still in expansionary territory, reflects significant headwinds from both weakening domestic demand and a challenging external environment. A key driver was the decline in new export business, which contracted for a second consecutive month at the fastest rate since December 2022, underscoring the limited relief from the fragile U.S.-China trade truce. Internally, persistent issues such as the property crisis and insufficient effective demand are creating deflationary pressures, evidenced by the steepest decline in output charges in over three years as firms engage in intense price competition. This challenging environment has led service providers to become cautious on hiring, with the employment sub-index declining. However, the data presents a divergent picture, as the Caixin China General Composite PMI, which includes manufacturing, rose to 51.3 from 49.6, suggesting that weakness in the services sector may have been offset by a recovery in other parts of the economy.

Key Decisions for Investors

• Given the sharp contraction in new export orders, investors should re-evaluate the exposure of portfolio companies to China's export-oriented service sector, as these firms face mounting pressure.
• The steep drop in output charges signals intense deflationary pressure and margin compression, warranting a cautious outlook on Chinese service companies with low pricing power.
• The divergence between the services-only PMI and the rising composite PMI suggests a potential rotation in the economy; monitor upcoming manufacturing and industrial data closely for confirmation of strength that could offset services weakness.
• Considering the commentary on insufficient domestic demand, investors should be wary of assuming that domestically-focused firms are entirely insulated from the current economic slowdown.