Service index shows signs of stabilizing economy

China's service sector expanded in November at the fastest pace since March as corporate confidence improved with a substantial increase of new orders, a private business survey showed on Wednesday.

Analysts said the stronger performance of the service sector adds to the evidence that the Chinese economy is stabilizing and that the sector, which already accounts for more than half of China's GDP, will continue as a key growth driver in 2020.

The Caixin China General Services Business Activity Index rose to a higher level than in each of the preceding seven months — 53.5 in November, up from 51.1 in October. The indicator for new export orders rose to a four-month high while overall new business also rebounded from the previous month with improved external and domestic demand, according to a survey jointly released by media group Caixin and information provider IHS Markit.

Surveyed companies said they planned to expand their business with new projects in the pipelines, and the overall demand in the service sector has improved. The gauge for employment slightly weakened from the previous month but remained in expansionary territory, according to the Caixin survey.

The Caixin service industry reading was the same as the official nonmanufacturing purchasing managers index released by the National Bureau of Statistics on Saturday, which also suggested activity expanding in November.

Mao Zhenhua, founder and president of China Chengxin International Credit Rating Co, said that the service sector will continue to be a major driving force of China's GDP growth next year.

Favorable policies can be expected to support employment in the sector while manufacturing may face expansion pressure due to excess capacity.

"The service sector still has large room to grow, including healthcare and pension services, which can create new jobs to offset economic slowdown risk," Mao said.

Services accounted for 59.7 percent of China's GDP in 2018. It is also the sector that provides the most jobs in the country, creating about 46.3 percent of jobs in 2018, the NBS said.

Li Xiujun, a senior credit analyst at Moody's Investors Service, said structural transformation of the economy will accelerate as the contribution of the service sector and consumer purchases to GDP growth see a steady rise in the coming years.

Chinese people's consumption of services has been steadily rising over the past two decades. Use of transportation and telecommunication services, for example, accounted for 18 percent of urban residents' total consumption in 2018, up from only 7 percent in 1998, according to a report by Moody's Investors Service. Residential expenditures for services in education, culture and entertainment and healthcare also increased substantially in the past 20 years.

"Such a trend in structural change will continue in the mid- and long-run as China follows the trend in many developed countries," Li said.

Economists at Standard Chartered said that the significant improvement of China's manufacturing and service PMIs is unlikely to change Beijing's policy direction, as the Chinese central bank is expected to maintain a pro-growth stance in the coming months.