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China July services PMI falls to near 9-year low

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Growth in China's services sector slowed sharply in July to its lowest level in nearly nine years, a private sector survey showed on Tuesday, indicating a recovery in the broader economy is still fragile and may need further government support.

Weakness was also seen in China's official services report at the weekend, which showed activity slipped to a six-month low. Both surveys contrast with other data in recent weeks which showed the economy was regaining momentum thanks to a spate of government stimulus measures.

The weaker readings in services, which account for about 45 percent of gross domestic product (GDP), raise the question of whether Beijing needs to do more to support growth, particularly in the rapidly cooling property sector.

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The services purchasing managers' index (PMI) compiled by HSBC/Markit fell to 50.0 in July from a 15-month high of 53.1 in June, the lowest reading since November 2005 when the data collection began.

The survey indicated a stagnation of service activity last month, as a reading above 50 in PMI surveys indicates an expansion in activity while one below the threshold points to a contraction.

In a sign that economic uncertainty has made companies more reluctant to spend, a sub-index measuring new business growth hit a 68-month low of 50.3 in July.

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Stock markets in Hong Kong and Shanghai turned negative after the survey was released, while most other Asian markets extended modest early losses.

The unexpected weakness in services comes after two separate PMI surveys last week showed China's factory sector posted its strongest growth in at least 1-1/2 years in July, adding to hopes that the economy was building up steam again after a weak start to the year.

"The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property related activity, such as agencies and residential services, see less business," said HSBC's China Chief economist Qu Hongbin.

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"Today's data points to the need of continued policy support to offset the drag from the property correction and consolidate the economic recovery," Qu said.

A similar survey by China's National Bureau of Statistics found non-manufacturing activity slowed to 54.2 in July from 55 in June. The official PMI is weighted more towards large state-owned firms.

China's once-heated housing market has slowed this year as sales and prices turned south in their biggest pull-back in two years, driven in part by the cooling economy and by the national government's nearly five-year-long campaign to keep price rises in check.

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But the extent and breadth of the downturn have surprised analysts, with many worrying that it is now the biggest threat to China's economy this year.

At least 23 regional governments, which earn a large chunk of their revenues by selling state land, have openly or quietly relaxed home purchase restrictions this year, according to data from CRIC, a unit of real estate services firm E-House China. State-controlled banks have also revved up lending to the sector.

The property slowdown may last for at least a year, though a market collapse is seen as unlikely, according to a Reuters analysts poll last week.

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Yet despite of the weakness in the services PMI, some measures suggested companies remained confident.

Firms surveyed indicated they increased their staff numbers moderately in the past month to meet planned company expansions, HSBC/Markit said. Still, optimism over the 12-month business outlook weakened from June.

Since April, China has steadily loosened policy by reducing the amount of cash that some banks have to hold as reserves, instructing regional governments to quicken their spending, and hastening the construction of railways and public housing.

Contact Asia Economy

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