China Services Grow at Joint-fastest Pace in 9 Months

Kimberly Watson, Editor in Chief
August 07, 2012 /

July’s survey findings showed business activity (covering manufacturing and services) in China rising at the join-fastest rate in nine months.

This was signalled by the HSBC Composite Output Index posting 51.9, up from 50.6 in June. Overall growth reflected an increase in manufacturing production – the first in five months – and a stronger expansion of service sector output. The latter was highlighted by a rise in the HSBC Business Activity Index from 52.3 to 53.1.

Behind the latest rise in service sector activity was a sustained increase in new order volumes. However, the rate of new business growth remained below-trend. This, coupled with a slower rate of decline in new orders placed at goods producers, meant that overall new business rose marginally in July.

Sub-par new order growth meant that capacity was little tested in China’s service sector, with backlogs of work falling for a sixth month in a row. A marginal rise in work-in-hand (but not yet completed) at goods producers was recorded by July’s manufacturing survey.

Jobs growth in China’s service sector also remained below trend in July, despite picking up from the month before. In contrast, the index measuring trends in manufacturing employment fell to a 40-month low, signalling a moderate rate of job shedding.

The rate of input price inflation in the service sector quickened slightly since the month before, but nevertheless remained lacklustre. Conversely, manufacturers recorded a sharp decline in purchasing costs. As a result, input prices fell for a second successive month.

Service providers reduced their average tariffs further in July, albeit at only a marginal rate. Respondents attributed reduced output charges to client requests for lower tariffs and competitive pressures. With goods producers reducing factory gate charges at a steep rate, total selling prices decreased markedly over the month.

Chinese service providers remained confident regarding the one-year outlook for activity in July. New product developments and buoyant economic prospects were cited by panellists as having supported positive sentiment in the latest survey period.

Around 30% of companies expected business activity to be higher in 12 months’ time, versus only 4% that anticipate a fall. That said, the degree of optimism was weak in the context of historical data, with the relevant index almost ten points lower than the long-run series average.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “The modest gain in July’s HSBC services and manufacturing PMIs implies that the slowdown of the Chinese economy is likely to have stabilized. That said, the pace of expansion suggested by the composite PMI remained only modest and is not sufficient to warrant a meaningful recovery. To secure growth and employment, Beijing still needs to step up policy easing and fast falling inflation allows them to do so.”

 

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