SHANGHAI, April 6 (Reuters) - - Activity in China's service sector strengthened in March, but employment fell for the first time in over 2.5 years, a private survey showed, sending mixed signals on the health of a sector which Beijing is counting on to offset prolonged weakness in manufacturing.
The Caixin/Markit services purchasing managers' index (PMI) for March rose to 52.2 from February's 51.2, as new business continued to expand modestly.
The employment sub-component, however, slipped to 48.9 from 51.3, pointing to the first contraction in staffing levels since August 2013.
A number of firms said they were not replacing staff who left voluntarily, while some others said they were downsizing due to muted growth in new business, the survey said.
Readings above 50 indicate an expansion on a monthly basis, while readings below indicate contraction.
"Overall, the services sector developed well, but the economy is riding choppy waves, indicating the lack of a solid foundation for a recovery," He Fan, chief economist at Caixin, said in a note.
"The government needs to push forward with 'supply-side reform' to encourage the development of emerging industries."
Recently announced government plans to cut excess capacity in struggling industrial sectors such as coal and steel are likely to result in nearly two million layoffs, according to statements by policymakers.
Beijing hopes many of those workers can be retrained or shunted into other sectors such as services, farming or forestry, keeping the threat of mass unemployment in check.
But the Caixin surveys suggest the downdraft from manufacturing is still intense.
Caixin's composite manufacturing and services PMI showed a return to growth in March, with the headline figure rising to 51.3 in March from 49.4 in February, helped by an unexpected improvement in the manufacturing sector.
But the composite employment figure dipped to 47.6, the lowest reading since January 2009 and the 10th straight month of contraction.
Some economists have cautioned that China's lengthy industrial slowdown would eventually begin to impact the service sector, too, as pinched manufacturing firms and workers begin to cut back on spending.
Both China's official and private Caixin factory readings showed manufacturers continued to shed jobs last month, but differed on whether the pace of layoffs was moderating.
The official survey suggested the job losses may be slowing, with the reading at the highest since June, but the Caixin survey showed manufacturers shedding staff for the 29th straight month and at almost the same pace as in February.