SERVICE activity in China's private companies expanded at its fastest pace in four months in January, an HSBC survey showed yesterday. Respondents cited stronger growth of new projects and new orders.

The HSBC Business Activity Index, which measures operating conditions in largely private and export-oriented companies in the service industry, posted 54 last month, up from December's 51.7.

A reading above 50 means expansion, and the survey report said the latest data signaled a solid expansion of business activity in China's service sector.

"Service activity resumed faster expansion on rising new business flows, along with the recovery of manufacturing growth," said Qu Hongbin, chief economist for China at HSBC Holdings Plc. "Still solid job gains plus higher business expectations are boding well for further improvement of the services sector's growth."

Qu said China's economic recovery is now on a firmer footing after growth bottomed out in the fourth quarter of last year.

The contribution of services to the economy has grown over the past decade as rising incomes spurred demand for consumption and leisure. Last year, the service industries accounted for 45 percent of gross domestic product, up from 41 percent in 2003, according to the National Bureau of Statistics.

The component indices showed that new business climbed to an eight-month high and employment rose at the second-fastest pace in the past 19 months.

"Service providers remained optimistic regarding the one-year business outlook in January, with the level of confidence the highest in the past eight months," the HSBC report said.

On the price front, input costs also gained at a marked rate, while average tariffs fell following a slight increase in December.

Tang Jianwei, an economist at the Bank of Communications, said service firms should pay heed to rising prices.

"Different from former inflation mainly driven by food costs, the future trend is that prices will be bolstered more by higher wages and more expensive resources," Tang said. "As an industry heavily reliant on people, the service sector should get prepared for higher operating costs."

The Consumer Price Index, the main gauge of inflation, rose 2.5 percent in December, the biggest gain in seven months. Some analysts predict the inflation may moderate to around 1.8 percent in January but the longer-term trend will be a mild increase.