China services sector maintains healthy growth in July

BEIJING Fri Aug 3, 2012 5:19am BST

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BEIJING (Reuters) - China's services sector expanded in July at a healthy clip, in contrast to a struggling manufacturing sector, although surveys released on Friday showed some signs of weakness in new orders and pressure from overcapacity.

China's official purchasing managers' index (PMI) for the services sector fell to 55.6 in July from 56.7 in June, the National Bureau of Statistics said. Growth in new orders eased, although construction services jumped.

A rival services purchasing managers' index (PMI), sponsored by HSBC, headed in the opposite direction, rising to 53.1 in July from a 10-month low of 52.3 in June. It showed new orders picking up, albeit at a below-trend pace.

Nevertheless, both headline readings were well above 50, which indicates growth in the sector's overall activity.

Dariusz Kowalcyzk, an economist with Credit Agricole-CIB in Hong Kong, said the data underlined that services are doing much better than the manufacturing sector, which would help combat the slowdown in economic growth.

"The decline is significant and we are surprised by its scope," he wrote in a client note, referring to the official services PMI.

"However, the 55.6 points level is relatively high, and much better than in the case of manufacturing PMI. It is consistent with solid growth of the services sector, which will put a floor under the whole economy," he said.

China's fast-growing services industry has so far weathered the global slowdown much better than China's vast factory sector. The services PMIs have consistently signalled healthy expansion, with the official version hitting a 10-month high in March and the HSBC survey reaching a 19-month high in May.

Two surveys this week on China's manufacturing industry showed PMI readings around 50. Combined, they signalled that smaller, private-sector firms were beginning to stabilise after months of weakness, while larger, state-owned enterprises faced pressure from unsold inventories and slowing growth.

The official services PMI showed water-borne transport, hotels, and postals services all contracted, while Internet software, air transport and residential services remained in growth territory.

"The index indicates the stable economy expansion in the non-manufacturing sector has not been changed," said Cai Jin, a vice president at the China Federation of Logistics and Purchasing (CFLP), which conducts the official survey on behalf of China's National Bureau of Statistics.

"The sub-indexes measuring input price and sales prices all dropped below 50, which shows the upward pressure on prices has been reduced."

Notably, the construction services sub-index rose by 2.3 points to 60.4 in the official PMI, indicating strong growth and reflecting a loosening of the tight restrictions on China's property developers that had reined in economic growth in the first half of 2012.

"With the end of rainy season and related investment projects startup, we expect the construction activity will remain buoyant," CFLP said.

Still, Markit Economics, which compiles the HSBC survey, said input prices increased slightly due to higher labour costs while sales prices fell, indicating the sector is still struggling with overcapacity.

EXPANSION

Relatively strong readings of services PMIs reflect long-term optimism that China's maturing economy will support more services and consumption.

China's top leaders, President Hu Jintao and Premier Wen Jiabao, promised this week to step up policy "fine tuning" in the second half of the year to support the economy.

Beijing has cut interest rates twice and banks' reserve requirements three times since November. Investors expect to see more, though few expect a full-blown stimulus package similar to the one launched during the global financial crisis of 2008/2009.

"The weaker the data now, the bigger the chance for stronger policy response, which eventually should be good for sentiment and for recovery of GDP growth later in H2," Kowalcyzk said.

China's economic growth has eased for six consecutive quarters, due to a domestic credit crunch and the chill of the euro zone debt crisis. However, a Reuters poll in July showed most economists estimate the slowdown bottomed out in the second quarter.

(Editing by Neil Fullick)

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