China's service sector grows at fastest pace in nearly six years, survey suggests

China’s services sector got off to a flying start in 2018, expanding at its fastest pace in almost six years as new orders surged and companies rushed to hire more staff, a private survey showed on Monday.

Economists also attributed the robust strength in services in January to better access to bank loans at the start of the year and solid demand before the long Lunar New Year celebrations, which fall in mid-February.

The Caixin/Markit services purchasing managers’ index rose to 54.7 in January from December’s 53.9, marking the highest reading since May 2012. The 50-mark separates growth from contraction on a monthly basis.

The upbeat findings, which echoed those of an official gauge of the non-manufacturing sector last week, bode well for Beijing’s longer-term goal of overhauling and modernising its economic growth model.

The government is counting on growth in consumption and services, particularly in high value-added areas such as finance and technology, to reduce the economy’s traditional reliance on heavy industry, investment and exports.

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The services sector already accounts for over half of China’s economy, with rising wages giving its consumers more spending power at home and abroad.

New business increased at the fastest pace in 32 months, the Caixin survey showed, with respondents linking the rise to new projects, company expansions and greater initiatives to win new clients.

The effort led companies to hire new workers at the fastest pace in five months.

Better access to financing likely also played a role in the sharp improvement in business conditions, some analysts said. The survey focuses on small and medium-sized firms which traditionally tend to have a tougher time securing funds than their larger state-owned peers.

“Banks normally dole out more credit at the start of the year, as opposed to being restrained by the lending quota last year,” said Wendy Chen, a Shanghai-based economist at Nomura. “IT-related services are a big driver behind the growth in services. We expect it to continue its momentum for the remainder of the year.”

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However, firms’ strong optimism about the business outlook over the next year eased to a four-month low on concerns that economic conditions may soften.

Profit margins also remained under pressure. Many companies reported a stiff rise in input costs for raw materials, transportation and salaries, but the survey suggested they were having a tough time passing higher costs on to their customers.

The official services PMI out last week showed activity accelerated to a four-month high in January, indicating broader economic resilience. That survey tends to focus more on larger and state-supported firms.

Retail, information technology and insurance services all sustained high growth rates in January, the official data showed.

Driven by strong readings in both the services and manufacturing sectors, the headline Caixin China Composite PMI rose to 53.7 in January, compared to 53.0 in December and the highest since January 2011.

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“Looking forward, we should watch for stability of demand in the manufacturing industry and the impact of growing costs on the profitability of service providers,” said Zhong Zhengsheng, director of Macroeconomic Analysis at CEBM Group.

The world’s second-biggest economy reported forecast beating growth of 6.9 per cent last year, handily exceeding the government’s target of about 6.5 per cent.

Economists polled by Reuters are pencilling in more moderate growth of 6.5 per cent this year, citing the expected drag from higher borrowing costs, a crackdown on air pollution and a cooling housing market.

Sustained and robust services growth, however, could offset softer industrial growth and increase the chance of an upside surprise.