China's services sector regained upward momentum in August, with overall business sentiment improving and the labor market continuing to expand, though growth in new export orders slowed and cost pressures ticked slightly higher.

Data released jointly by S&P Global and RatingDog on September 3 showed the country's services business activity index climbing from July's 50.4 to 51.4 in August, putting an end to the previous easing trend. While the reading still points to only moderate expansion, it extends the sector's growth streak that has been uninterrupted since January 2023.

Employment emerged as a highlight in this month's report. Services sector hiring expanded for a fourth consecutive month, marking the longest continuous run of job growth since 2023, with the pace of increase also accelerating to one of the strongest levels seen in nearly three years. Meanwhile, the composite output index rose from 50.8 in July to 52.1, as both manufacturing and services recorded faster growth in output and new orders. That said, the pace of expansion in these indicators remained below the average level seen throughout 2026 so far.

On the pricing front, input costs rose for the 18th consecutive month. While July's inflation rate had touched a six-month low, August saw a modest rebound. Service providers raised their charges for a third straight month, extending the longest run of price increases since the first half of 2024, though the scale of increases remained mild.

Services activity firms up, new orders grow at quicker clip

The August reading of 51.4 for the services business activity index was the second-lowest in 14 months, yet it marked a clear improvement from July, when the figure had hit its lowest point since September 2024.

New business in the services sector has now grown for 44 consecutive months, with the pace of expansion rebounding from July's four-month low. Companies attributed the rise in activity to expanding market demand, improved financial conditions, customer acquisition efforts, and business innovation.

The domestic market remained the primary driver of new business growth, while overseas new orders expanded for a fourth month in a row. However, the pace of growth continued to ease from the 20-month high recorded in June, registering only a modest increase.

Yao Yu, founder of RatingDog, commented: "Overall, the services sector showed a moderate recovery in August, with faster growth in business activity and new orders, continued employment expansion, and improved business confidence."

Employment keeps climbing while backlog growth slows

Labor market data provided a noteworthy structural signal in this month's report. Services employment grew for a fourth consecutive month, representing the longest continuous expansion cycle since 2023, with the pace also ranking among the strongest seen in nearly three years. Companies attributed the increase in headcount to business expansion, rising client demand, and higher wages aimed at attracting and retaining staff.

At the same time, the volume of unfinished work has now accumulated for 10 straight months, the longest such run since the 2022至2023 period. But the pace of backlog growth slowed in August to its weakest since April, reflecting that service firms' overall capacity to handle orders has been steadily improving as headcount expands.

Yao Yu pointed out that the slowing growth in backlogs is precisely a reflection of continued capacity expansion among businesses, corroborating the trend seen in employment growth.

Cost pressures edge up slightly while price increases stay mild

Pricing showed signs of a slight uptick in temperature. After 18 consecutive months of input cost increases, August's inflation rate accelerated marginally from July's six-month low. Factors driving costs higher included labor, raw materials, diesel, oil, increased purchasing activity, strong demand, and equipment replacement.

On the output price side, businesses raised their charges for a third consecutive month, the longest run of price increases since the first half of 2024. The scale of this month's increase was unchanged from July and remained mild. On a composite basis, the rise in combined goods and services charges was the slowest since January of this year.

Yao Yu noted that the further easing in new export business growth and the slight uptick in cost pressures warrant continued monitoring, but the services PMI is expected to stay in expansion territory in the near term.

Looking ahead, Chinese services firms hold a positive view of activity prospects over the next 12 months. Business optimism improved from July's recent low, linked to expansion plans, new project rollouts, expectations of market growth, increased promotional activity, and strategic adjustments.

However, Yao Yu cautioned that current confidence levels remain below the 2026 year-to-date average, suggesting that corporate optimism regarding the medium-term outlook has yet to return to the highs seen earlier this year.