(Corrects paragraph 7 to clarify sub-index remained below 50.0 but did not decline.)
BEIJING (Reuters) - Activity in China's services sector contracted at the sharpest pace in two years in March as a surge in coronavirus cases restricted mobility and weighed on demand, a private sector survey showed on Wednesday.
The Caixin services Purchasing Managers' Index (PMI) dived to 42.0 in March from 50.2 in February, dropping below the 50-point mark that separates growth from contraction on a monthly basis. The reading indicates the sharpest activity decline since the initial onset of the COVID-19 pandemic in February 2020.
The survey, which focuses more on small firms in coastal regions, tallied with an official survey, which also showed deterioration in the services sector.
Analysts say contact-intensive services sectors such as transportation, hotel and catering were hurt the most, clouding the outlook for a much anticipated rebound in consumption this year.
A sub-index for new business fell for a second consecutive month, and at the fastest pace since March 2020.
Firms' input prices rose in March after easing to a six-month low in February.
The virus outbreaks and softer demand reduced firms' appetite for additional staff, with the employment sub-index showing continued contraction in activity albeit at a slower pace.
While firms remained generally upbeat about output over the next year, optimism slipped to a 19-month low amid concerns over the pandemic and the economic fallout from the Ukraine war.
Caixin's March composite PMI, which includes both manufacturing and services activity, slumped to 43.9 from 50.1 in the previous month, signalling the quickest reduction since the height of the country's COVID-19 outbreak in 2020.
"Overall, both manufacturing and services activities weakened in March due to the epidemic. Similar to previous COVID outbreaks in China, the services sector was more significantly affected than manufacturing," said Wang Zhe, Senior Economist at Caixin Insight Group, in a statement accompanying the data release.
"Policymakers should look out for vulnerable groups and enhance support for key industries and small and micro businesses to stabilise market expectations."
As China’s economy faces serious challenges, the big question is how long the country's “zero tolerance” COVID policy can be sustained, Zhiwei Zhang, chief economist at Pinpoint Asset Management said in a note.
"Economic activities have been sacrificed to achieve more effective policies against the Omicron outbreaks. I expect the outbreaks will be brought under control, with significant economic costs," Zhang said.
The Caixin PMI is compiled by S&P Global (NYSE:SPGI) from responses to questionnaires sent to purchasing managers in China.
(This story corrects paragraph 7 to clarify sub-index remained below 50.0 but did not decline)