UPDATE 2-China July official services PMI dips to 6-month low

Sun Aug 3, 2014 12:22am EDT

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BEIJING Aug 3 (Reuters) - Growth in China's services sector slipped to a six-month low in July as new orders rose at their weakest rate in at least a year, data showed, taking some of the shine off an industry that has been a bright spot in the Chinese economy this year.

The official Purchasing Managers' Index (PMI) for the non-manufacturing sector slowed to 54.2 in July from June's 55, the National Bureau of Statistics said on Sunday. That is the weakest reading since January.

A reading above 50 in PMI surveys indicates an expansion in activity while one below the threshold points to a contraction.

The slight retreat in the services sector came at a time when China's factories have started to recover, having earlier this year been one of the drags on growth in the world's second largest economy due to faltering demand at home and abroad.

In contrast, China's services companies have held up through each slowdown since PMI records began in January 2007, with the index staying above 50 in every month.

A mixed performance from other measures in Sunday's PMI suggested that the services sector enjoyed an encouraging, albeit slightly muddy, outlook.

Growth in new orders fell to their slackest rate in at least a year in July. Yet at the same time, companies' business expectations jumped to a level not seen in at least a year. Inflation within the sector, be it production or final sales prices, also quickened to a rate unseen in at least 12 months.

Cai Jin, vice president of China Federation of Logistics & Purchasing, which publishes the services PMI in conjunction with China's government, advised investors to not read too much into the divergence.

"The volatility in the various sub-indices for the July services PMI was not great," Cai said. "The market in general is still stable."

In contrast, he said weakness in China's property sector persisted last month due to seasonal factors and muted demand.

"The market remains subdued. Prices are still in a downtrend, and declines have increased."

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 a cooling economy, and after the government tried for almost five years to calm the market.

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

To limit the drag from a cooling housing sector on the overall economy, nearly half of China's regional governments have started relaxing curbs on home purchases this year, reversing controls that were instituted from as early as 2009.

STRONGER FACTORY GROWTH

The services PMI followed two manufacturing PMIs released on Friday that showed China's factory sector posting its strongest growth in at least 1-1/2 years last month, suggesting that the economy is gathering steam after a spate of stimulus measures.

Economic growth picked-up slightly in the second quarter, accelerating to 7.5 percent from an 18-month low of 7.4 percent between January and March.

Sunday's survey showed a sub-index for business expectations rose to 63.9 last month from June's 62.9, while the measure for new orders slipped to 50.3 from June's 50.9.

Production prices climbed to 58.2 from June's 57.1, while final sales prices jumped to 52.4 from June's 51.2.

But with China's consumer inflation running well below the government's annual 3.5 percent target, policymakers are unlikely to be fazed by rising prices in the service sector.

In fact, Chinese authorities have steadily loosened monetary policy since April to energise the economy, including relaxing the reserve requirements for some banks. The construction of railways and public housing projects have also been hastened to spur investment.

The services sector, which accounted for 45 percent of China's gross domestic product in 2012 and roughly half of all jobs in the country, is expected to post steady growth in coming years as the economy matures. (Reporting by China Economics Team; Editing by Simon Cameron-Moore)

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