Caixin China Services PMI (May 2017):No sign of contraction

The Caixin China Services PMI rose to 52.8 in May, defying some expectations fora slowdown. After a surprise contraction in the manufacturing gauge late lastweek, which we argued missed the broad-based nature of the recovery, the betterservices PMI should provide some reassurance. The breakdown showed fairlyrobust business conditions and rising business expectations, although inputprices and employment grew at a slower pace. The composite (manufacturing plusservices) PMI rose to 51.5 from 51.2. As the re-stocking cycle slows and housingsales moderate, we expect growth momentum in the Chinese economy to soften inthe coming quarters. But the more broad-based nature of the recovery, which isled by the private sector, and supported by stronger overseas as well as domesticdemand, points to a moderate slowdown rather than a return to deflation. From6.9% y-o-y in Q1, growth is expected to soften and average 6.7% y-o-y in 2017.