The service sector is propping up the economy in China and driving Japan's economic expansion, according to new figures released Monday.
The numbers suggest there should still be legs in the stock rally in Japan, which has been this year's star-performing market in Asia. The Topix broad-market index is up 18.8% in 2023.
Chinese shares, however, have underperformed as the economic expansion loses steam, with the CSI 300 index of the largest mainland stocks down 1.1% year to date. The Hang Seng Index in Hong Kong is down 5.2%, capturing outward-looking Chinese companies, including many with dual listings overseas.
Japan's service sector grew at a record pace in May, according to a private survey compiled by S&P Global and sponsored by au Jibun Bank.
The Japan services purchasing-managers index (PMI) hit 55.9 for May, up from 55.4 the month before. That makes nine consecutive months of expansion, with any reading over 50 showing that the sector is growing.
Business expansion is strong, according to the survey, with export orders demonstrating a hefty increase in demand. Domestic business orders are also strong, suggesting the pace will continue, with "work in hand" but not yet completed also increasing at a record rate.
In fact, there's now pressure on companies to sustain the levels of demand given their capacity. The survey is compiled using answers from around 400 service-sector companies in Japan from sectors including finance, insurance, property, transport and communications. Staffing and inflation are also putting pressure on service-sector companies.
The recent removal of the last of Japan's Covid-19 restrictions has benefitted sectors such as travel, with both domestic and international tourism figures strong. Arrivals from abroad approached 2 million in April, the highest rate of travel since the pandemic began.
It is likely that the index will continue to set further peak highs over the next 12 months. The survey also shows that business optimism is heady and just off April's peak levels. Hiring expanded for the fourth straight month, with the number of jobs created at the second-highest on record, behind only April 2019.
A separate composite PMI combining both service-sector and manufacturing output shows that services are leading the expansion, but manufacturing is solid and returned to expansionary territory for the first time in 11 months. The composite reading stands at 54.3 in May, up from 52.9 in April, and the second-strongest on record since the survey began in 2007.
"The upturn was led by the dominant services sector, although there was a renewed sense of optimism for private-sector activity given the expansions in manufacturing output and new orders," S&P Global economist Usamah Bhatti says in releasing the data.
In China, another private survey released Monday also shows expansion. The closely watched Caixin China General Services PMI rose to 57.1 for May, up from 56.4 in April. That's the second-strongest post-pandemic reading, lower than only March this year.
It means the service sector in China stands in contrast to manufacturing, which led the immediate recovery once Covid rules were suddenly removed in December but has since lost its way. Global demand is lagging and causing supply issues for Chinese manufacturers.
Caixin, the most-prominent Chinese-language business publication, notes that its readings differ from the official figures from the National Bureau of Statistics. Both the official manufacturing and services PMI figures fell in May, dragging overall output down 1.5 percentage points to 52.9, the lowest level of the year.
The Chinese survey is also compiled by S&P Global, this time from responses at around 650 service-sector companies, both entirely private and state-owned. Surveyed companies say the market is improving, requiring them to fill vacancies and increase capacity. Backlogs are rising as they are in Japan due to a decent level of orders, although the increase in the backlog level is slowing, suggesting that situation may not last for long.
Companies are being forced to raise prices to contend with higher labor costs, a similar story to that in Japan, where years of deflation appear to have ended. Business expectations in China fell for the fourth month in a row to their lowest level this year, and below the historical average, although sentiment is still better than last year, when China's attempt to stamp out Covid-19 caused a high degree of uncertainty for all sorts of companies.