China's services sector is improving at the fastest pace since the start of the year

Photo: Joel Kowsky/ NASA via Getty.

China’s services sector, one of the areas tasked with helping to bolster economic growth in the years ahead, put in a strong showing in May with activity levels improving at the fastest pace since January, according to data released today.

The Caixin-IHS Markit services Purchasing Managers Index (PMI) jumped 1.3 points to 52.8 last month, pointing to an improvement in activity levels across the sector.

The PMI measures changes in activity levels across China’s services sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

The strength in the Caixin-Markit survey also mirrored improved activity levels in the government’s official non-manufacturing PMI report, released last week.

However, as seen in the chart below, the improvement in services was largely offset by renewed weakness in China’s manufacturing sector, seeing the Caixin-IHS Markit China Composite PMI — a reading on activity levels across both sectors — inch up 0.3 points to 51.5 in May.

Source: IHS Markit

“Stronger growth in services activity reflected a quicker increase in total new business during May. Moreover, the latest expansion in new orders was the most marked in the year-to-date and solid amid reports of stronger underlying client demand,” said IHS Markit.

Fitting with that view, the group said that new orders grew at a faster pace, while order backlogs also increased.

“According to panellists, higher new orders contributed to renewed pressure on operating capacity,” it said.

Firms also added to staffing levels for a ninth consecutive month, albeit at a slower pace, while input costs — a measure of inflation across the sector — also rebounded after hitting a six-month low in April.

“The solid increase in input costs was generally linked to greater prices for raw materials and higher staff costs,” IHS Markit said.

Given the strength of the report, the group said that confidence towards the 12-month outlook “improved slightly”, rebounding after hitting a five-month low in April.

However, while the May report card on services was largely upbeat, the same can’t be said for China’s manufacturing sector which saw activity levels weaken for the first time in close to a year last month.

“The improvement in the services sector bolstered the Chinese economy in May,” said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group.

“The rapid deterioration in the manufacturing industry is worrying. We need to closely monitor whether the diverging trends in manufacturing and services will widen further.”

For the moment, that has ensured that optimism over the today’s report has been largely kept in check.

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