China's service sector remains a bright spot as factory data disappoints, Caixin reading shows

China's services activity remained well within growth territory in April, even as a private survey showed a softer reading compared with March.

The Caixin/S&P Global services purchasing managers' index fell to 56.4 in April from 57.8 in the previous month. That's still the second-highest figure recorded since November 2020.

It also marked the fourth consecutive month above the 50-mark that separates growth and contraction.

The latest Caixin reading suggests that services activity is still "undergoing a fast recovery," according to Wang Zhe, senior economist at Caixin Insight Group.

"There was still a lot of optimism in the services sector in April, with the reading for expectations for future activity remaining well above the neutral 50.0 level," Wang wrote, adding that "businesses continued to express confidence in a better market environment as the impact from Covid waned."

Expansion in new orders for services also softened slightly from the previous month's reading, which was the highest in 28 months. New business from abroad also rose at a historically sharp pace, despite growth moderating from March, Caixin said.

The continued expansion in China's services activity stood in contrast to the disappointing factory activity reported earlier in the week.

The Caixin China general manufacturing purchasing managers' index fell to 49.5 in April, marking the first reading below the 50-mark in three months.

New orders fell, providing further evidence of a short-lived improvement in factory production in February, when the reading hit its highest level in eight months.

"Higher activity levels were frequently linked to the return to more normal operating conditions as the impact of the pandemic continued to fade, leading to firmer demand and higher customer numbers," S&P Global Market Intelligence's chief business economist Chris Williamson said of Caixin's factory activity data.

The National Bureau of Statistics' manufacturing PMI reading also missed expectations and fell into contraction territory with a reading of 49.2 in April from March's reading of 51.9.

A separate reading from Friday's Caixin survey also showed a softer albeit sustained expansion in overall business activity.

The Caixin China general composite purchasing managers index fell from March's 54.5 to 53.6 in April, marking the slowest growth rate recorded since January this year.

"While the upturn continued to be largely driven by the service sector, both manufacturers and service providers noted softer rises in output compared to March," Caixin said in its Friday release.

Caixin's Wang noted the gap between factory and services data.

"It is worth noting that manufacturing and services activity diverged, with employment and input costs in the manufacturing sector contracting significantly," Wang wrote.

"It remains to be seen if the economic rebound is sustainable after a short-term release of pent-up demand, with a number of indicators flagging that the recovery has yet to find a stable footing," he wrote.

Earlier in the week, S&P noted the latest disappointments in China's manufacturing activity data hint at potential downside risks to the economy's second-quarter growth.

"April's service sector PMI data will be of greater importance in determining the near-term path of GDP, due to the sector's greater share of the economy and the role of resurgent consumer spending on services in the latest upturn," at S&P wrote.

"On a brighter note, the drop in prices recorded by the survey suggests that mainland China does not seem to be exporting higher inflationary pressures to other economies," he said.