Services boost augurs well for the economy

New business growth to help counter market volatility, external headwinds 

Activity in China's services sector further improved in April, with exports rising at a fast clip, a private business survey showed on Monday, pointing to healthy momentum for the rest of the year.

The Caixin China General Services Business Activity Index inched up to 54.5 in April from the previous month's 54.4, the second-highest level since May 2012.

The rise in services activity was supported by a further significant increase in new business across the sector, despite the new order growth rate softening slightly since March. According to the companies surveyed, improved marketing strategies, new product offerings and firmer underlying market demand supported the latest increase in sales, said the report issued by Caixin Insight Group and IHS Markit.

The volume of new export business received by the service industry rose at the fastest pace in April since the survey was launched in late 2014. Many companies said demand has become stronger in major markets and firms have stepped up efforts to expand their overseas client base, it said.

Service companies contributed largely to the increase in overall business activity in April. The Caixin China Composite Output Index stood at 52.7, which was above the neutral 50.0 value and down slightly from a nine-month high of 52.9 in March. The data indicated that Chinese business activity continued to rise strongly last month, the report said.

The private survey results are not completely in line with the official nonmanufacturing business activity index of the service industry in April, which was 53.3, down from 53.6 in March, according to the National Bureau of Statistics. During the same period, the official composite PMI output index dropped from 54.0 to 53.4, and the official manufacturing PMI fell from 50.5 to 50.1.

Fan Lei, an economist at Sealand Securities Co Ltd, said the PMI drop in April was mainly caused by seasonal factors, while the trend toward economic stabilization is still ongoing.

"Resilient real estate investment, infrastructure investment backed by public finance, and stabilization of consumption will continue to support the overall domestic demand. China's lowering of its value-added tax rates will also hopefully improve corporate profitability and revitalize manufacturing industry investment step by step," said Fan in a research note.

He maintained his forecast that the Chinese economy may rebound slightly around the third quarter of this year.

Ren Zeping, chief economist of property developer Evergrande Group, said although the official manufacturing PMI in April dropped slightly from the previous month, it was above the neutral 50.0 value for two consecutive months, which shows that the economy has continued to stabilize but the foundation is not solid yet.

"The demand and prices increased whereas the inventory declined, signifying that China's economic cycle is turning from reducing inventory actively to reducing inventory passively and the economy is in the early stage of recovery," said Ren in a report.

"Benefiting from tax and fee cuts and financial inclusion, the vitality of small enterprises has significantly improved," he added.

According to the Caixin/Markit PMI report, considering both the services and manufacturing companies, at the composite level, input costs rose at a modest pace that was the fastest seen for five months. It also found that business confidence remained relatively subdued across China in April amid concerns over the strength of the global economy.

"In general, China's economy looked resilient in April, especially in the services sector. However, pressure on costs across the services sector remained relatively high, limiting companies' profit growth potential. Business confidence hasn't recovered.

"Market participants must remain patient to wait for the economy to stabilize. We expect that policymakers will slightly restrain from countercyclical policies, and focus more on structural and systematic policies," said Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin Insight Group.