Navigating China's economic crossroads: challenges and opportunities ahead

Services activity in China expanded at the slowest rate in eight months in June while business confidence plunged to a four-year low, a private sector survey showed on Wednesday. The Caixin/S&P Global services purchasing managers' index(PMI) came in at 51.2 versus 54.0 in May and was the lowest since October 2023. But the PMI still remained in expansionary territory for the 18th month in a row and stayed above the 50-mark that separates expansion from contraction.

The survey, which focuses mostly on private and export-oriented firms, corresponded to the broader official PMI released on Sunday, which showed services sector activity at a five-month low. The world's second-largest economy has lacked steady growth recently, calling for more policy support in order to realise an ambitious growth target of around 5%.

The new orders sub-index slipped to 52.1 in June from 55.4 the previous month, while overseas demand also lost a bit of ground despite May's strong exports. Business confidence slid to its lowest since March 2020, as concerns about the global economy and rising competition took a toll. Service providers slashed jobs in June after boosting them in May.

The slowdown in the rate of inflation at both the input and selling prices, however, offered some relief to enterprises, which have been under pressure from higher raw materials, labour and transportation costs. The Caixin/S&P's composite PMI, which covers both services and manufacturing sectors, dipped to 52.8 from 54.1.

Attention has shifted to a leadership conclave in mid-July, known as the third plenum, which is rumoured to unveil far-reaching reforms. According to policy advisers, two of the most important agendas to be discussed at that meeting will include measures to shift part of the income of central authorities down to local governments, thereby reducing the reliance on land sales.

"Fiscal and tax reforms should focus on creating more optimistic expectations among market participants," said Wang Zhe, senior economist at Caixin Insight Group.

The slowdown of China's services sector in June points to additional needs for more economic stimulus if the economy is to stay on target. However, there is some hope from continuous easing of inflation and expansionary trend. In this regard, the role played by the upcoming third plenum in July assumes great significance in shaping the future economic landscape. Grappling with these headwinds, China's economic prospects will depend on policy actions that shore up confidence in the markets.