China services growth slows sharply, adds to recovery risk

BEIJING Mon May 6, 2013 4:59am EDT

A parking lot is seen along the Huangpu River near the financial district of Pudong in Shanghai December 12, 2012. REUTERS/Carlos Barria

A parking lot is seen along the Huangpu River near the financial district of Pudong in Shanghai December 12, 2012.

Credit: Reuters/Carlos Barria

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BEIJING (Reuters) - Growth in China's services sector slowed sharply in April to its lowest point since August 2011, a private sector survey showed on Monday - fresh evidence of rising risks to a revival in the world's No.2 economy.

The HSBC services Purchasing Managers' Index (PMI) fell to 51.1 in April from 54.3 in March, with new order expansion the slowest in 20 months and staffing levels in the service sector decreasing for the first time since January 2009.

Two separate PMIs last week had already shown that China's manufacturing sector growth slowed, With the weakness spreading to services, which make up almost half of gross domestic product, the risk to the recovery may be increasing.

"The weak HSBC service PMI figure provides further evidence of a slowdown not only in the factory sector but also in the service sector," said Zhang Zhiwei, chief China economist at Nomura Securities in Hong Kong.

"This confirms our worries about insufficient growth momentum in the economy, which we expect to slow to 7.5 percent in the second quarter."

The HSBC services PMI follows a similar survey by China's National Bureau of Statistics, which found non-manufacturing activity eased to 54.5 from 55.6. The official PMI is more weighted towards large state-owned firms.

Readings above 50 indicate activity in the sector is growing, while those below 50 indicate it is contracting.

The HSBC survey showed that the sub-index measuring new business orders dropped sharply to a 20-month low of 51.5 in April, with only 15 percent of survey respondents reporting an increased volume of new orders that month, HSBC said.

"This started to bite employment growth. All these are likely to add some risk to China's growth in 2Q, as there's still a bumpy road towards sustaining growth recovery," said HSBC's China chief economist Qu Hongbin.

The employment sub-index decreased to 49.6 in April, the first net reduction in staff numbers since January 2009, although HSBC said job losses were marginal, partially caused by firms down-sizing and employee resignations.

Employment is a decisive factor shaping government thinking because it is crucial for social stability. The services sector accounted for 46 percent of China's gross domestic product in 2012, as big as the country's better-known manufacturing industry.

China's economic growth unexpectedly stumbled in the first quarter, slipping to 7.7 percent versus 7.9 percent in the previous three month period, as factory output and investment slowed.

The government has set a 2013 growth target of 7.5 percent, a level Beijing deems sufficient for job creation while providing some room to reform to the economy.

Any more weak data could spark a policy response.

"The risk of slower growth is rising, the Chinese government will probably take actions after April data come out," said Jianguang Shen, chief China economist of Mizuho Securities Asia in Hong Kong.

"I see an increasing possibility for China to cut interest rates, but not likely any time in the near future, as housing inflation is a constraint."

However a Reuters poll last month found that China's central bank is expected to keep the benchmark one-year bank lending rate at 6 percent and the one-year bank deposit rate at 3 percent through 2013, as well as holding banks' reserve requirement ratios (RRR) steady.

(Reporting By Beijing economics team; Editing by Eric Meijer)

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Comments (4)
RickPeters10 wrote:
Recovery risk? Are you kidding? Sure their economy has slowed but with growth still over 7% pa I would hardly put the spin on it that they are facing a risk to recovery. Just think what it would be like if the other major world economies had GDP growth of 7%.

I also love the diametrically opposed “news” reports where China’s growth is unsustainable, it can’t keep growing even at 7% pa, and their economy is “at risk” because it is only growing at 7% pa.

Well 7%+pa is 7%+pa more than the year before and that is very good growth.

May 06, 2013 4:12am EDT  --  Report as abuse
breezinthru wrote:
The stock market ignores this negative data and responds instead to the US employment figures? Most of Europe is in recession.
The rest of Europe is slowing. China and Europe account for the lion’s share of Germany’s economic activity.

And when you really take a close look at the US employment data, it the only number that can be construed as good is the level of unemployment at 7.5%. If you look at the rest of the data that came out in the same report, it appears that the reason the number has dropped is that even more long-term unemployed people have stopped looking for work.

It has little, if anything to do with the improved health of our economy.

The sequester effects are just beginning to hit the US economy and I’d expect to see the effects of January’s 2% tax increase begin to hit around June or so.

The Fed can’t save us. They have been flooding the US economy with cheap money for years and they can’t go much lower with interest rates.

So… either Congress takes rapid, effective steps to dramatically improve the consumer’s willingness and ability to spend money or we are all going to hell in a hand basket.

May 06, 2013 8:37am EDT  --  Report as abuse
jrj906202 wrote:
China should inflate some bubbles,like Bernanke is doing.A housing bubble works in the U.S.,since it makes people think they are getting richer.All China needs to do is release phony,low inflation numbers,while the bubble is inflating.Works for us.

May 06, 2013 12:36pm EDT  --  Report as abuse
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