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China's services sector strengthened in January

Photo: Feng Li/Getty Images.

Activity across China’s services sector, now the largest component of the broader Chinese economy, strengthened modestly in January.

The Caixin-Markit services purchasing manager index (PMI) rose by 2.2 points to 52.4 in January, leaving the index above the 50 level that separates expansion from contraction.

Activity across the sector is now growing at the fastest pace seen since July 2015.

According to Markit, the improvement was led by an acceleration in new orders which grew at the fastest pace in three months.

The surveys employment gauge also impressed, rising to the highest level seen since July 2015.

Like the headline index, sentiment towards the business outlook for the year ahead rose to a six-month high, although Markit noted that it still remains well below the series long-run average.

Despite the strong increase, He Fan, chief economist at Caixin Insight Group, suggests that the government can do more to foster the expansion across the burgeoning sector.

“The headline Caixin China General Services PMI for January is 52.4, the highest level since July. It marks a significant improvement of 2.2 points over the reading for December,” he said. “Overall, the fast development of the services sector has to a large extent offset the impact of weakening manufacturing, indicating a better economic structure.”

“The government should continue to deepen reform, relax administrative controls and reduce restrictions on market entry for service providers. This will release the potential of the services sector and help improve the economic structure.”

The Markit survey, focused on privately owned small to medium sized firms, now portrays a similar picture to the official non-manufacturing PMI gauge released by China’s National Bureau of Statistics earlier this week.

That survey, larger and inclusive of small, medium and large firms from both the public and private sectors, came in at 53.5 for January, down 0.9 points on December.

Despite the small deceleration, it too remains above the 50 level that indicates that activity levels are improving.

While China’s manufacturing sector remains weak, contracting at the fastest pace since mid-2012 in January, both service sector PMI surveys suggest that activity levels continue to improve, indicating that China’s economic transition gathered momentum in the early parts of the year.

According to China’s government, the nation’s tertiary industry – largely encompassing services – accounted for 50.5% of economic output in 2015, up 2.4 percentage points on a year earlier.

Although there are persistent doubts about the veracity of the GDP data, this indicates that the services sector now accounts for more than half of the broader Chinese economy.

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