China's service sector shrank for the fourth consecutive month in December as the ongoing measures to contain COVID-19 disrupted operations and hampered demand.
At 48.0, the Caixin services Purchasing Managers' Index rose from a six-month low of 46.7 in November, survey results from S&P Global showed Thursday. But a reading below 50.0 suggests the sector remains in the contraction zone.
The COVID-19 containment measures, including temporary business closures, dampened production.
Further, due to pandemic-related restrictions, outstanding business increased for the fifth consecutive month as firms were unable to work through backlogs of work.
Cost reduction policies together with voluntary leavers drove another fall in service sector employment. The pace of job shedding was quicker than seen on average in 2022.
On the price front, the survey showed that input cost inflation slowed to a six-month low. Consequently, firms raised their own charges at the softest pace since August.
Another reason for the easing in output price inflation was stiff competition. Optimism among service providers was the strongest since July 2021.
Companies that foresee higher output expect the pandemic situation to improve, restrictions to ease, and operations and demand to recover.
The overall private sector that combines manufacturing and services shrank for the fourth straight month in December. But the rate of contraction eased with softer falls in output across manufacturing and services.
The composite output index picked up to 48.3 in December from 47.0 in November.
Infections are expected to explode in the short run, which will disrupt production and everyday life, Wang Zhe, a senior economist at Caixin Insight Group said.
"How to effectively coordinate COVID-19 controls with economic and social development has once again become a crucial question."
In order to prop up domestic consumption, various policies are needed that work in tandem with stabilizing the job market and effectively increasing the disposable incomes of residents, said Zhe.
China has abruptly dropped ultra-strict curbs on travel and activity, potentially unleashing the virus on the nation's 1.4 billion people. Many funeral homes and hospitals say they are overwhelmed, but investors hope that once the infection waves pass, life and spending can return to normal and are looking beyond the most immediate difficulties.
"China reopening has a big impact ... worldwide," said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only spurs tourism and consumption but can ease some of the supply-chain crunches seen during 2022.
"There will be hiccups on the way," Goh said, during an outlook presentation to reporters. "We give it six months adjusting to the process. But we don't think it's reversible."
China's central bank also said overnight it will step up financing support to spur domestic consumption and key investment projects and support a stable real estate market.
E-commerce and consumer stocks were among the biggest gainers in Hong Kong, which touched a six-month high and was last up 1%. Reopening hopes have driven China's yuan to four-month highs and supported regional stocks and currencies.
The yuan rose about 0.2% to 6.8750 on Thursday.
