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China's services activity at 3-month high

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China's services sector grew at its fastest pace in three months in December as new orders remained strong, a private survey showed, an encouraging sign of strength even as manufacturing activity slows and the property market softens.

The HSBC/Markit Services Purchasing Managers' Index(PMI) picked up to 53.4 last month from November's 53.0, well above the 50-point level that separates growth from contraction in activity on a monthly basis.

A sub-index measuring new business cooled slightly to 53.9 in December from a 2-1/2 years high of 54.2 in November, but remained well in expansion territory.

The labor market was also buoyant. The employment sub-index hit a 18-month high in December as companies expanded. Chinese leaders suggested last year they could tolerate somewhat slower economic growth as long as labor markets remained resilient.

But services firms were not so optimistic on the outlook. A sub-index for business expectations for the year ahead dipped to the lowest level since August 2014, with many firms saying increasing competition was dampening their pricing power.

The robustness in the services sector contrasted sharply with manufacturing surveys last week, which showed factories were struggling at the end of 2014. The findings reinforced expectations that Beijing will roll out more stimulus to avert a sharper slowdown which could trigger job losses and debt defaults.

"The services sector continued to hold up well amidst the manufacturing downturn, providing some counter-weight to the downward pressures on the economy," said Qu Hongbin, chief China economist at HSBC.

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"We continue to believe that there is insufficient demand in the overall economy and more (policy) easing measures are warranted in the coming months."

A similar official survey released last week also showed the services sector remained strong, with the services PMI rising to 54.1 in December from November's 53.9. That survey focuses more on larger, state-owned firms.

Hurt by a sagging housing market as well as slowing domestic demand and investment, China's economy is expected to grow at its slowest pace in 24 years in 2014, with annual growth seen at 7.4 percent.

Some economists have urged Beijing to set a growth target of 7 percent for 2015, compared with 7.5 percent for 2014.

After saying for months that China doesn't need any big economic stimulus, the central bank unexpectedly cut interest rates in November for the first time in more than two years to support growth. It has also loosened some lending restrictions to persuade banks to make more loans and injected funds into the banking system in an attempt to bring down borrowing costs.

While its recent moves may have bought the central bank some time to see if conditions improve, many economists still expect more interest rate cuts as well as reductions in banks' required reserve ratios (RRR) this year, perhaps as soon as the first quarter.