China’s Services Slowdown Reinforces Our Recession View

Following an article we published last week ‘Consumer Not Immune As Downturn Intensifies’, in which we stressed that consumer spending in China was in for a tough time in the near term as the economy entered a fully-fledged recession, we have seen the HSBC Services Index lend support to this view.

The services index, which is much more reflective of consumer spending as opposed to the manufacturing index (which has a higher concentration of companies involved in producing investment goods), has been outperforming for a number of years. However, the index has undergone a sharp deterioration of late.

The same is true of the official Non-Manufacturing Index, which has been under pressure recently. The average of the two indices has fallen very close to the 50 level that separates expansion and contraction, and we expect this level to be breached before a sustainable recovery is in place. The details of the HSBC report highlighted a decline in profit margins for the services sector, which is something we are seeing across the board in various industries. The inevitable result of this will be weaker capital expenditures (capex) and more labour shedding. Furthermore, in an effort to support the economy, the People’s Bank of China is likely to weaken the yuan currency over the coming months.

This blog is tagged to:
Sector: Country Risk, Financial Markets
Geography: Asia, China

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