Commerzbank says China’s August Services PMI rebound highlights some resilience in private-sector activity, but weak retail sales, soft inflation and higher unemployment still point to fragile domestic demand. The stronger PMI reduces the urgency for immediate PBoC easing, while leaving room for further support if growth weakens into year-end.

Fragile demand keeps PBoC easing options open

“China’s private services sector activity rebounded more strongly than expected in August, offering a bright spot in an otherwise subdued domestic demand picture. The RatingDog China Services PMI rose to 51.4 (Bloomberg consensus: 50.6) vs 50.4 in July.”

“The print marks a recovery from a near two-year low in July and pushed the composite PMI to 52.1 from 50.8. The result stands in contrast to the official non-manufacturing PMI, which remained unchanged at 49.0 in August.”

“The divergence between the private and official gauges warrants attention. The official non-manufacturing PMI, which captures a broader universe of state-linked service providers and includes construction, remained at 49.0, weighed down by a continued slump in construction activity.”

“The August services PMI rebound, while encouraging, does not materially alter the broader policy calculus for the PBoC. Retail sales growth of just 0.6% yoy in July and a surveyed jobless rate that ticked up to 5.2% indicate that the consumption recovery remains uneven and fragile.”

“With CPI running well below target and PPI softening, the PBoC retains room to ease further if growth conditions deteriorate into year-end. The services PMI print reduces the urgency of immediate action but does not close the door on RRR cuts or targeted lending facility expansions in the coming months.”