China services activity expands at softer pace as firms feel margin squeeze

The latest figures reinforce the narrative of a Chinese economy that is expanding but is still facing weak pricing strength, which goes some way to explaining why policymakers have turned to targeted assistance, such as the recent enlargement of share buyback credit. Falling charges alongside increasing expenses highlight profit pressure for listed service-sector companies, which could cap any stock-market uplift from the policy moves. Businesses specifically pointed to oil among rising input expenses, signalling that greater energy costs connected to the Middle East turmoil are feeding into China's economy even as firms are unable to shift those costs onto customers. For the Australian dollar and raw materials, the slightly stronger factory output offers a small counterbalance, but the weaker services reading provides little reason to anticipate a bigger demand boost from China.

Chinese service companies are still attracting customers and adding workers, though they are lowering prices to achieve this while their expenses rise, a pinch that emerges in earnings before it appears in expansion.

Key points:

• The RatingDog China General Services PMI declined to 50.8 in October from 51.6, marking the weakest expansion in three months
• New orders increased at a steady rate, and overseas orders expanded for the sixth consecutive month
• Headcount rose for the sixth month at a quicker pace, and outstanding work declined for the first time in a year, supported by AI-driven efficiencies
• Prices charged fell for the second month, whereas input costs accelerated to the fastest pace in five months, driven by labour, raw material and oil expenses
• Business optimism dropped to a three-month low
• The composite PMI retreated to 52.0 from 52.4, even as manufacturing output growth quickened

China's services sector maintained growth in October but at a more moderate rate, according to a private survey released on Wednesday. Businesses reduced prices to win orders even as their expenses climbed at the quickest pace in five months.

The RatingDog China General Services PMI, produced by S&P Global, slipped to 50.8 in October from 51.6 in September. The figure remained above the 50 threshold that indicates expansion versus contraction, though it reflected the weakest activity growth in three months. Companies cited operational limitations as a reason for the deceleration.

Demand was more resilient than the top-line figure suggests. New business kept rising at a solid pace, broadly unchanged from September, continuing a streak that started in January 2023. Companies credited broader client bases and effective marketing initiatives. International orders grew for the sixth month in a row, the longest stretch since 2024, although the pace slowed and was only slight.

Recruitment strengthened. Employment increased for the sixth month, and at a quicker clip than in September, as businesses brought on both full-time and part-time workers. The additional personnel, together with what firms described as productivity improvements from AI, helped clear backlogs for the first time in a year.

Pricing remains the primary worry. Average prices charged declined for the second month as firms offered discounts to deal with intense competition, though the rate of discounting eased compared with September. Meanwhile, input cost inflation hit a five-month peak, fuelled by higher wages, raw material and oil costs, with some companies also referencing social security contributions. That mix suggests strain on profit margins.

Business sentiment remained positive but weakened to a three-month low, as companies grew concerned about increasing costs and competition.

A separate composite index, covering both manufacturing and services, dipped to 52.0 from 52.4, representing the weakest increase in private-sector output in three months. Faster expansion in factory activity was insufficient to counterbalance the softer services growth.

RatingDog founder Yao Yu noted that steady new orders and firmer hiring underpinned expansion at the beginning of the fourth quarter, but that renewed discounting and climbing costs were exerting pressure on earnings.