December 5, 2016 / 6:31 AM / 8 months ago

China services sector activity expands at quickest rate in 16 months in November - Caixin PMI

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Sales people wait for customers at booths selling mobile phones in Beijing September 3, 2013.Kim Kyung-Hoon/Files

BEIJING (Reuters) - Growth in China's services sector accelerated to a 16-month high in November, a private survey showed, though the increase in new orders dipped slightly and business expectations moderated.

The survey, along with solid factory activity readings last week, suggest building momentum for China's economy at the end of a year that saw growth stabilise, though economists say an unsustainable rebound in prices is largely responsible for the recent strength.

The Caixin/Markit services purchasing managers' index (PMI) rose to 53.1 in November on a seasonally adjusted basis from 52.4 in October.

A reading above the 50-mark suggests expansion in activity on a monthly basis. The November number marked the highest for the survey since July 2015.

Input prices for services companies rose at the fastest pace since February 2015, with a number of companies surveyed indicating higher commodities prices and wages. However, intense competition limited how much they could pass higher prices along to customers, raising the spectre of slimmer profit margins.

A survey of manufacturers last week suggested prices are rising at the fastest pace in over five years, with higher commodity prices contributing to a boost in industrial profits.

The government has said organic growth remains relatively weak, and analysts believe a boost from prices will be short-lived without a corresponding increase in demand.

"(Price pressure) likely reflects currency moves and the bounce in commodity prices. That can't be good for margins. And at time when financial conditions are tightening, this is bound to weigh on investment," HSBC co-head of Asian economics research Frederic Neumann wrote in a note on Friday after the factory PMIs.

While service companies added staff at the fastest pace in a year-and-a-half, their business expectations hit a 13-month low in November, with Markit saying "the degree of positive sentiment was one of the lowest seen in the series history."

Indeed, Chinese companies say higher wages continue to put pressure on margins as sales growth hasn't kept up.

"Price inflation, rather than a structural improvement, seems to be the main reason behind the recent recovery of the economy in general. The economy may remain stable in the fourth quarter, but it will still face significant downward pressure next year," Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said in a note with the report.

New business for services companies continued to expand but at a slightly slower pace from October.

The upbeat findings broadly echo those of an official services survey last week which showed growth picked up to levels not seen since 2014.

China is counting on growth in services and consumption to offset persistent weakness in exports that is dragging on the economy.

Caixin's composite PMI covering both the manufacturing and services sectors was unchanged in November from the previous month's 52.9, also pointing to solid growth.

Reporting by Elias Glenn; Editing by Kim Coghill

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