Marginal contraction in Feb business activity largely due to seasonal factors

The services sector saw modest growth in China in February despite the marginal contraction in business transactions on a monthly basis amid renewed optimism about its long-term recovery, a private survey said on Wednesday.

The headline seasonally adjusted Caixin Business Activity Index, which measures the operations of China's service industry, edged down from 52.0 in January to 51.5 in February due to falling overseas demand and pressures in the domestic job market. The monthly reading still remained in expansionary territory, even though it was the lowest reading since April last year.

New orders rose at a moderate pace last month. Although some companies saw strong demand from customers, new COVID-19 cases crimped order growth. In February, new export orders fell for the first time since October, even though the contraction rate was modest.

HSBC economist Erin Xin said the seasonal dip in Caixin services data was largely due to the Spring Festival holiday, which fell in February this year. Coupled with government restrictions due to new COVID-19 cases, such as curbs on interregional travel and discouraging public gatherings, activity was subdued in some offline services, said Xin.

"That said, the headline activity reading is still in expansionary territory, buoyed in part by some shifts in consumption patterns toward a 'staying-put' Chinese Lunar New Year as more people turned to local tourism, online shopping and entertainment activities," she said.

Some service providers lowered their head count in February. Though the job cuts were mild, it was the first time that the employment numbers had fallen since July. But the reduction in crew seemed to have exerted little pressure on operating capacities, as companies continued to clear business backlogs at a steady pace.

Operating costs of services providers rose again in February. Though not as sharp as the number registered at the beginning of the year, the upturn was among the quickest seen in the past decade. Higher purchasing and staffing costs were key drivers of inflation. But companies only partially passed on the higher input costs to clients, as prices charged rose moderately.

The Caixin Composite Output Index, which measures the country's overall business vitality, came at 51.7 in February, slightly down from 52.2 in January, making it the lowest growth rate in 10 months.

Wang Zhe, a senior economist at Caixin Insight Group, said manufacturing momentum and services recovery weakened in February. Sluggish overseas demand and stress in the job market resulted in the temporary contraction, he said.

"Despite the headwinds, manufacturers and service providers are still optimistic. The confidence comes mainly from their experience in fighting the pandemic over the past year, as well as expectations that the winter COVID-19 flare-ups are coming to an end. In addition, companies are also more confident on the future outlook for their new products," he said.

Xin from HSBC described the softer February reading as "transitory". As business expectations improve, China's full economic recovery will continue to be supported by resilient domestic demand and a gradual global recovery, she said.