China services sector expands at fastest pace in four months in May - Caixin PMI

By Yawen Chen and Ryan Woo

BEIJING (Reuters) - Activity in China's services sector expanded at the fastest pace in fourth months in May thanks to a surge in new orders, a private business survey showed, helping to offset worries about unexpected weakness in manufacturing.

The Caixin/Markit services purchasing managers' index (PMI) rose to 52.8 in May from April's 51.5, breaking a four-month decline and marking the highest reading since January. There was no breakdown by business segment in the survey.

The findings are in sync with an official survey last week which also pointed to accelerated growth and stronger demand in services. The sector accounts for more than half of China's gross domestic product.

The new orders sub-index rose to 53.5 in May from April's 53.0, signalling the strongest customer demand since December.

The 12-month business outlook among the mostly small and medium-sized services providers in the survey also rose from a five-month low in April.

That bodes well for a government that is counting on services, particularly high value-added services in finance and technology, to lessen the economy's traditional reliance on heavy industry and investment.

A similar Caixin survey last week showed the manufacturing sector unexpectedly contracted in May as demand ebbed and shrinking factory prices dented profits.

That contrasted with slow but steady growth shown in official data, but the weaker-than-expected private survey underlined investors' nervousness about the outlook for the rest of the year. Most China watchers are expecting the economy to cool in coming months after a strong first quarter, but believe the loss of momentum will be gradual.

"The improvement in the services sector bolstered the Chinese economy in May," said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group in an accompanying note to the data.

"However, the rapid deterioration in the manufacturing industry is worrying."

Caixin's composite manufacturing and services PMI, also released on Monday, rose to 51.5 in May from 51.2 in March.

Despite stronger increases in activity and new work, however, services company raised their staffing levels only slightly in May, with the rate of job creation falling to its lowest in nine months.

China's small and medium-sized companies employ about 80 percent of the country's working population.

Profit margins also remained under pressure, with services companies only able to pass on a marginal portion of their rising input costs to consumers.

A flurry of official measures targeting financial deleveraging is expected to further squeeze financing costs and erode profits in the coming months.

Most economists expect China's quarterly economic growth to slow in the coming months from 6.9 percent in January-March. The government has set a GDP growth target of around 6.5 percent for this year.

(Reporting by Yawen Chen and Ryan Woo; Editing by Kim Coghill)