China's services sector swings to growth in May for the first time since January

The rate of expansion was the steepest recorded since October 2010, which companies attributed to the easing of lockdown measures

A couple pose for photographs next to the Bund Bull in Shanghai's Bund Financial Square. China's Caixin / Markit Business Activity index showed new orders for businesses increased in May for the firstShow more

The service sector in China, the world’s second-largest economy, bounced back in May, recording growth for the first time since January as it recovers from a coronavirus-induced slowdown.

The seasonally-adjusted Caixin/Markit Business Activity Index rose to 55 in May, from 44.4 in April. The rate of expansion was the steepest recorded since October 2010, which the survey attributed to the easing of lockdown measures. A reading above a neutral 50 level indicates economic expansion and below points to a contraction.

An improvement in client demand led to the first upturn in total new orders since the beginning of the year. The rate of expansion was the sharpest since September 2010 and faster than the historical average, according to the survey.

Data indicated that the increase was largely supported by firmer domestic demand, as new export business continued to fall markedly in May. Firms said external demand was “weak amid the ongoing pandemic and subsequent public health measures” elsewhere in the world.

“Supply and demand both recovered quickly in the services sector,” Wang Zhe, a senior economist at Caixin Insight Group, which compiles the survey with IHS Markit, said.

“External demand remained sluggish, however, as the pandemic continued raging overseas.”

Service companies are optimistic about business prospects over the next 12 months as restrictions were gradually lifted and demand in the broader economy recovered, he added.

China, where the Covid-19 outbreak originated, had forced a strict lockdown to curb the spread of the disease. Restrictions on movement and the temporary closure of businesses led to a 6.8 per cent contraction in its economy at the end of the first quarter, the first since quarterly records began.

The Caixin China Composite Output Index – a weighted average of the Manufacturing Output Index and the Services Business Activity Index – also jumped to 54.5 in May from 47.6 in April, driven by a sharp rise in both the manufacturing and service sectors. The rate of growth was the quickest since January 2011.

Overall, new work also rose for the first time in four months. The rise was due to an increase in sales at services companies, as new orders declined slightly across the manufacturing sector.

Efforts to improve efficiency, however, led to a further fall in staffing. Employment trends remained subdued in both sectors amid signs of spare capacity.

“Employment in the services sector remained worrisome,” Mr Wang said. “Most companies in the survey expressed caution about expanding hiring, citing concerns over cutting cost and improving efficiency.”

Backlogs of work fell for the first time in a year. Average input costs fell slightly for the second month running, while efforts to attract new orders led to a further drop in output charges, according to the survey.