China's service sector activity soars

Activity in China’s services sector rose to an 11-month high in June, a private survey showed on Tuesday, diverging from struggling manufacturing in a trend that if sustainable would indicate Beijing is making progress in rebalancing the economy.

However, a composite measure of activity fell to a four- month low, highlighting that a growing services sector may not be able to make up for a prolonged decline in the industrial economy that has pushed China’s growth to 25-year lows.

The Caixin/Markit services Purchasing Managers’ Index (PMI) for June rose to 52.7 from 51.2 in May on a seasonally adjusted basis. Readings above 50 indicate an expansion on a monthly basis, while readings below signal contraction.

New business expanded at the fastest rate since July 2015, prompting services firms to hire more workers for the third month in a row, though the rate of job creation was moderate.

Beijing has been counting on a strong services sector to pick up the slack as it shifts the economy towards stronger consumption and away from a dependence on heavy industry and manufacturing exports. “Service sector growth is now supporting the overall economy, and the expansion for services is coming at a time when the manufacturing index is contracting, suggesting the nation’s economic structure is becoming more balanced,” said Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group.

“The government must continue to relax service sector controls to encourage its development and push forward the nation’s economic transformation.”

Despite strength in the services sector, however, the Caixin/Markit composite PMI covering both manufacturing and service activity fell to 50.3 in June, down from 50.5 in May and just above the neutral mark. The findings support concerns that strength in services will not be enough to backstop growth if manufacturing continues to decline, and analysts are raising expectations of more government spending and policy easing by the central bank.

A composite employment indicator showed companies shed jobs for the 13th straight month in June, though official data has shown no meaningful increase in unemployment. A stronger reading from China’s official services PMI released on Friday appeared to be driven mostly by big gains in the construction industry, which may not be sustainable.

Beijing has fast-tracked planned infrastructure spending this year to boost growth, and a strong run-up in housing prices as buying restrictions were loosened helped turn around a slowdown in property development.

Factory surveys for June showed continued pressure on manufacturers, with uncertainty from Britain’s vote to exit the European Union adding to the risks for China’s struggling exporters.