China's Services Activity Slumps After Delta Lockdowns

Activity in China‘s services sector slumped into sharp contraction in August, a private survey showed on Friday, as restrictions to curb the Covid-19 Delta variant threatened to derail the recovery in the world’s second-biggest economy.

The Caixin/Markit services Purchasing Managers’ Index (PMI) fell to 46.7 in August from 54.9 in July, plunging to its lowest level since the pandemic’s first wave in April 2020. The 50-point mark separates growth from contraction on a monthly basis.

The grim readings in the private survey, which focuses more on smaller firms in coastal regions, tally with findings in an official survey earlier this week which also showed growth in the services sector slipped into contraction.

China‘s services sector was slower to recover from the pandemic than manufacturing, but has been helped by a gradual improvement in consumption in recent months.

The country appears to have largely contained the latest coronavirus outbreaks of the more infectious Delta variant, with just one locally transmitted case reported on Sept 1 after several days of zero cases.

But it spurred authorities across the country to impose measures including mass testing for millions of people as well as travel restrictions of varying degrees in August, hitting especially the catering, transportation, accommodation and entertainment industries.

“Service costs were still under great pressure amid elevated labour and transportation costs amid the Covid-19 resurgence,” Wang Zhe, a senior economist at Caixin Insight Group, said.

Sub-indexes for new business, prices charged, and employment in the Caixin survey all contracted in August. New export business rose.

“Sluggish market demand limited businesses’ bargaining power, causing prices charged by service providers to slip after a month of growth,” Wang said.

‘Delta terrible’

Rooms that were originally 300-400 yuan are now discounted to around 200 yuan and “still no one is coming,” said the manager of a hotel in Zhangjiajie, Hunan province, one of the hotspots of the August epidemic.

“Delta is so terrible, people don’t want to go out.”

Some extra business over national holidays in the rest of the year won’t make up for the loss of the summer vacation period, he said.

Business owners in areas with few virus cases were also hit.

“Inter-provincial flight-plus-hotel travel packages didn’t resume until mid-August, which had a pretty big impact on business – now the peak season’s already passed,” said a bed and breakfast owner in Sanya, in the southern island province of Hainan.

An index of business confidence in the Caixin survey fell slightly from July but remained at a high level.

Caixin’s August composite PMI, which includes both manufacturing and services activity, fell to 47.2 from July’s 53.1.

• Reuters and Jim Pollard