China Service Sector Contracts Sharply As Virus Containment Steps Tighten

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China's service sector contracted notably in March as the recent rise in COVID-19 cases and restrictions to limit the spread of the virus led to a marked drop in activity, survey results from S&P Global showed on Wednesday.

The Caixin services Purchasing Managers' Index fell to 42.0 in March from 50.2 in February. This was the steepest fall since the initial onset of the pandemic in February 2020.

Total new work decreased at the fastest pace since March 2020. Pandemic-related restrictions, notably those on mobility, were frequently attributed to lower customer numbers and softer demand conditions.

Staffing levels fell in March but the pace of reduction was only fractional. At the same time, disruption to business operations led to a further increase in the level of outstanding business.

There was a stronger rise in input costs faced by services companies. The rate of inflation was solid overall and quicker than the series average.

Although fees charged by services companies rose slightly, the rate of increase was the softest seen in the current seven-month period of inflation.

When assessing the 12-month outlook for business activity, Chinese services companies were generally upbeat that output would expand over the next year. However, the degree of optimism slipped to its lowest for 19 months.

China's overall private sector activity shrank the most since the initial onset of the pandemic in February 2020.

The composite output index fell to 43.9 in March from 50.1 in the previous month. The reading reflected renewed falls in both manufacturing and services activity, with the latter noting the faster rate of decline.

"At present, China is facing the most severe wave of outbreaks since the beginning of 2020, Wang Zhe, a senior economist at Caixin Insight Group said. Uncertainty also increased abroad.

The outcome of the war between Russia and Ukraine is uncertain, and the commodity market has convulsed, Wang added. Several factors have aggravated the downward pressure on China's economy and underscore the risk of stagflation.

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