China's services activity plummets in Feb as coronavirus wipes sales

China's services sector had its worst month on record in February as new orders plummeted to their lowest level since the global financial crisis, a business survey showed on Wednesday, with economists urging swift support to avoid mass bankruptcies.

The Caixin/Markit services purchasing managers' index (PMI) almost halved last month to just 26.5 from 51.8 in January. It was the first drop below the 50-point margin that separates growth from contraction on a monthly basis for the first time since the survey began almost 15 years ago in late 2005.

The sharp correction suggests more urgent action is needed to support the sector, which includes many small retailers that are vulnerable to the coronavirus crisis that flared in late January.

Business activity almost ground to a halt as tens of millions were forced to stay at home amid strict travel restrictions while many restaurants, malls, and movie theatres remained closed, even as some provinces lifted curbs.

"Stagnating consumption amid the coronavirus epidemic has had a great impact on the service sector," Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, wrote in a note accompanying the Caixin PMI release.

The slump in the private sector survey, which focuses more on small, export-oriented companies, echoed an official survey last week, which also showed the activity falling at a record pace.

Beijing needs a robust services sector to cushion a prolonged slowdown in manufacturing and investment and create jobs for workers laid off in other areas.

President Xi Jinping recently affirmed the country's determination to meet unspecified pre-set economic targets this year but analysts at Nomura say high frequency data suggests output in the first quarter could slump further.

While new confirmed virus cases have fallen notably in China, they continue to rise rapidly overseas.

"Although policies have been introduced to provide tax and financing support for industries and small businesses heavily impacted by the epidemic, service companies were still concerned about uncertainties resulting from the epidemic," CEBM Group's Zhong said.

Worst Sales since financial crisis

China's February services PMI showed the steepest decline in new work since November 2008 while outstanding orders surged to a record high as many were unable to deliver services and temporarily closed shop due to the outbreak.

Demand shrank the most at home, but new orders from overseas also fell sharply from the previous month. Export demand fell the most since the sub-index started in September 2014.

Services companies shed jobs for the first time in nearly a year-and-a-half with the employment sub-index hitting its lowest ever. At the same time, some firms are struggling to recruit staff due to travel restrictions.

To increase sales, firms have lowered prices for the third time with discounting at its most aggressive in almost eight years. Meanwhile, expectations regarding the one-year outlook for business became the gloomiest since the series began in 2005.

A China Merchants Bank survey of over 20,000 companies mostly in the services sector conducted in February showed nearly 20% of the companies face "severe difficulties" due to the coronavirus, while nearly 6 per cent are on the brink of collapse.

"While the epidemic has had a more obvious effect on the manufacturing sector, it would be more difficult for service companies to make up their cash flow losses," CEBM's Zhong said.

Caixin's composite manufacturing and services PMI, also released on Wednesday, slowed to a record low of 27.5 in February from 51.9 in January.