(Adds analyst comment)
By Elias Glenn
BEIJING, Oct 9 (Reuters) - Activity in China’s services sector grew at its slowest pace in 21 months in September as new orders cooled, a private survey showed, blurring the picture of how the economy is performing heading into a key Communist Party Congress.
The findings of the Caixin/Markit survey reinforce views that China’s smaller companies are continuing to struggle, while large state-owned giants are apparently reaping most of the benefits from a year-long, government-led construction boom.
However, many analysts believe China’s robust industrial rally cannot be sustained much longer, putting pressure on policymakers to finds ways to energize the lacklustre private sector, which accounts for over half of the country’s investment and jobs.
The central bank threw a fresh lifeline to smaller firms last week in an attempt to redress that deep structural imbalance, offering an earnings booster to banks if they ramp up lending to more vulnerable sectors of the economy.
China is counting on growth in services, particularly high value-added services in finance and technology, to reduce the economy’s traditional reliance on heavy industry and investment.
But Monday’s private survey suggested many services firms are facing a bumpy ride.
The Caixin/Markit services purchasing managers’ index (PMI) fell to 50.6 in September, the lowest reading since December 2015 and one of the weakest since the survey began in 2005.
A reading above 50 indicates growth, and any lower signals contraction. The index had hit a three-month high in August.
To be sure, the private findings were in sharp contrast to official data which showed services activity expanded at the fastest clip since 2014 in September.
But an official factory survey showed a similar trend, with big companies seeing strong improvements in business conditions while smaller ones struggled to grow, exposing a key fault line underneath the rosy headline growth numbers.
Still, Capital Economics’ China economist Julian Evans-Pritchard, who has been among those predicting a broader slowdown, said it was too early to tell if the Caixin service survey pointed to a turning point just yet.
Retail sales over the just-ended Golden Week holiday rose 10.3 percent from a year earlier, slowing but only slightly from the pace in 2016, data showed on Monday.
“It is notable that there are signs of weakness in other parts of the economy and I do think services have softened a bit...I think we will see a slowdown in industrial production as well over the coming few months,” Evans-Pritchard said.
After China posted forecast-beating growth of 6.9 percent in the first half, analysts have said it was only a matter of time before it started to lose steam, especially as the government looks to contain the risks from an explosive build-up in debt, a campaign which is pushing up borrowing costs.
Still, economists expect September data to be released over the next few weeks could show a bounce in activity after a slightly softer August, welcome news for leaders ahead of a twice-a-decade party congress that kicks off on Oct. 18.
Even if growth does start to fade, few China watchers see the risk of an economic hard landing. Beijing should easily meet or beat its full-year growth target of around 6.5 percent after the rousing start to the year.
“The Chinese economy generally held up well in the third quarter,” Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said in a note accompanying the PMI survey.
“However, the expansion in both manufacturing and services cooled in September, suggesting downward pressure on economic growth may re-emerge in the fourth quarter.” (Reporting by Elias Glenn; Editing by Kim Coghill)