China Services PMI slows to three-month low; what lies ahead for Chinese stocks?

The RatingDog China General Services Purchasing Managers' Index (PMI) declined to 50.8 in October from 51.6 in September, marking its weakest reading since July, a private-sector survey showed on Wednesday. The index remained above the 50-mark threshold that separates expansion from contraction, indicating continued growth, albeit at a slower pace.

According to a Reuters report, new business continued to expand at a pace broadly unchanged from September, while new export business increased for a sixth consecutive month. This extended the longest streak of growth in new export orders since 2024, providing some support to the services sector.

Services companies also continued to add full-time and part-time employees to manage existing workloads, suggesting that labour demand remained relatively resilient despite the moderation in overall activity.

However, Reuters reported that intensifying competition forced services companies to reduce their average selling prices for a second consecutive month. The week-long Golden Week holiday also provided limited support to business activity.

Meanwhile, input prices increased at their fastest pace in five months, driven by higher costs of materials, fuel and wages. The combination of rising operating expenses and declining selling prices threatens to squeeze profit margins across the services industry.

Business confidence also weakened to its lowest level since July, with companies expressing concerns over rising input costs and heightened competition, the Reuters report said.

China Stock Market ImpactThe weaker services PMI reading could weigh on sentiment towards Chinese equities, particularly consumer-facing companies, as investors look for stronger evidence of a sustained recovery in domestic demand.

The slowdown, although not indicating an outright contraction, highlights the challenges facing China's economic recovery. Rising input costs alongside falling selling prices could put additional pressure on corporate profitability.

Consumer discretionary stocks, including retail, travel, hospitality and leisure companies, could face pressure amid concerns over spending and pricing power. Technology and internet companies may also remain vulnerable to margin concerns due to intensifying competition.

The data could add to cautious sentiment towards Hong Kong-listed Chinese companies and the broader Shanghai and Shenzhen markets.

However, continued growth in new export business for a sixth straight month offers a relatively positive signal for companies exposed to overseas demand.

Overall, the October services PMI is a mildly negative signal for Chinese equities. Investors may remain cautious as rising costs, declining selling prices and weakening business confidence point to persistent challenges for corporate earnings and the broader economic recovery.