< Back to News

China Services Growth at Record Low in August: HSBC

China’ services sector grew in August at its weakest pace on record, a private survey showed on Monday, as new orders ebbed and tightening measures to rein in an exuberant property sector started to pinch.

The slowdown in the services sector to below levels seen during the global financial crisis reinforces signs that the world’ second-biggest economy is losing steam, even as global demand sputters.

While the services sector accounts for less than 45 percent of China’ gross domestic product, similar PMI reports last week showed growth in its manufacturing sector has also cooled considerably, and even contracted according to one survey.

Though a sharp economic slowdown is not expected at this point, the combination of cooling growth at home and a prolonged slump abroad will not be welcomed by policymakers in Beijing who are still struggling to tamp down high inflation with tighter policy without further curbing growth.

The world economy faces risks from both slowing growth and persistent inflationary pressure, which is spilling over from emerging to advanced economies, Ma Delun, a vice-governor at China’ central bank, said in comments reported on Friday. The comments about world economic prospects echoed earlier ones from Chinese Premier Wen Jiabao, underscoring that Beijing is not counting on major foreign markets to recover quickly.

The HSBC’ Services Purchasing Managers’ Index (PMI), which provides a snapshot of conditions in industries from restaurants to computing, slid to 50.6 in August from July’ 53.5, said Markit, a British research firm that compiles the index.

The August reading was the lowest since the survey begun in November 2005 and was a touch lower than the previous trough of 51.2 during the global crisis.

The 50-point level demarcates expansion from contraction. The figures are seasonally adjusted.

“Overall, services sectors are set to slow as both credit and property tightening measures are filtering through,” said Qu Hongbin, China economist at HSBC.

India PMI data released on Monday also showed that country’ services sector also grew more sluggishly in August. The HSBC Markit Business Activity Index dropped to 53.8 from 58.2 in July, slowed by a faltering global economy and India’ tight monetary conditions.

India’ services sector, which includes outsourcing power-houses like Tata Consultancy Services and Infosys, has traditionally shrugged off weak global economic conditions due to its ability to take on more work at a time when companies worldwide seek to lower costs.

In China, the August slowdown was mainly driven by a slip in new business flows, as businesses found it more difficult to win new contacts.

The new business sub-index fell from July’ 52.6 to 51.2, the second-lowest reading in the survey’ history, Qu said in a note to clients.

Despite the fall, China’ PMI reading still implied an annual expansion of 8-9 percent for the service sectors, Qu said.

The property market is unlikely to collapse, not least because of Chinese households’ low leverage ratio and credit tightening is approaching to an end, Qu added.

“This, plus the still resilient consumer spending, suggests China’ services sector is likely to see moderation, not meltdown, in the coming months,” he said.

In one worrisome sign, the survey showed input prices remained elevated in August, with respondents citing higher wage costs, which often lead to further broad price rises.

In a bid to tame stubborn high inflation, the central bank has raised interest rates five times since October and lifted the deposit reserve requirement ratio nine times.

The government has also unveiled a flurry of steps to cool property price rises, including home purchase restrictions, the launch of a property tax and increased mortgage rates.

China will release August inflation figures on Friday, giving investors a picture of how successful those measures have been.

A separate PMI for China’ services sector, published by the China Federation of Logistics and Purchase, dipped to 57.6 percent in August from 59.6 percent in July as railway investment fell following a deadly high-speed train crash.

The reading follows a pair of manufacturing PMIs last week that showed China’ factory activity steadied in August owing to solid domestic demand, but tight monetary policy at home and torpid demand abroad dimmed chances for a sustained recovery.

An official government survey showed factory activity growth picked up a but, despite a sharp drop in new export orders, while a survey conducted for HSBC shrank showed the sector shrank slightly for a second straight month, albeit not as much as initially feared.

While retail sales clocked up 17.2 percent growth in July from a year earlier, domestic demand may not be resilient enough yet to rebalance the export-oriented economy on its own.

Home-grown Chinese automakers are reeling after Beijing stripped away incentives for some cars at the end of last year, though Western brands are faring much better.

Source: CNBC