BEIJING A raft of China data over the coming week will give the first indications of the economy's third-quarter performance, after conflicting signals suggested that more stimulus measures may be needed to ensure a sustained recovery.
While manufacturing appears to have picked up, thanks largely to government support measures and a modest resurgence in exports, data this week showed sudden and unexpected weakness in the services sector.
The decline appeared linked to the cooling property market, which may be facing a prolonged slump that could hurt related businesses and dampen consumer confidence.
A Reuters poll of 30 economists shows factory output likely held steady in July while overall investment growth ticked higher, chiming with expectations that a flurry of pro-growth steps from Beijing earlier this year is paying dividends.
Anecdotal evidence, however, suggests property investment, sales and construction could show a seventh month of deterioration, suggesting the sector will be an increasing drag on activity even if other parts of the world's second largest economy are gaining traction.
"We expect the upcoming July data to show steady momentum in real economic activity, on the back of the ongoing export recovery, policy support, robust credit expansion and improving business confidence," Wang Tao, an economist at UBS, said in a recent note to clients.
Some economists are concerned that policy measures may only generate a quick and temporary boost to factory activity before their effects begin fading out later in the year, much like the trend seen in past years when the government rolled out similar support measures.
But other economists played down such worries, saying that a single month of data is far from enough to judge the health of the entire services sector or whether consumers are starting to tighten their purse strings.
"I think people might overplay this particular weak reading of service PMIs in one particular month," said Helen Qiao, chief China economist at Morgan Stanley in Hong Kong.
Indeed, economists in the latest poll expect retail sales grew 12.4 percent in July from a year earlier, the same pace as in June.
"I still believe that it is more likely to be a property index caused issue and that will go away as the policy impact kicks in," Qiao added.
The poll showed that fixed-asset investment, a key driver of the economy and also an important indicator to gauge the effect of government measures, is forecast to have grown 17.4 percent in the first seven months of 2014 from a year earlier, a touch higher than 17.3 percent rise in the first half.
Factory output likely grew by an annual 9.0 percent in July, compared with 9.2 percent in June, mainly due to a higher comparison base of a year ago, analysts said.
China's leaders have stressed that they would focus more on measures targeted to help specific sectors in the second half of this year instead of massive and more general stimulus spending.
Since April, Beijing has loosened policy by reducing the amount of cash that some banks have to hold as reserves, instructing regional governments to quicken their spending, and hastening the construction of railways and public housing.
A growing number of local governments, which earn a large chunk of their revenues by selling state land, have also relaxed home purchase restrictions to support the sector, while state-controlled banks have revved up mortgage lending.
The property slowdown may last for at least a year, weighing on the economy well into 2015, though a collapse is seen as unlikely if local governments continue to relax controls and banks keep credit ample, according to a Reuters poll last week.
That would reinforce expectations that Beijing will stick to more modest support measures in coming months, unless conditions in the property sector significantly worsen.
"Despite market excitement triggered by recent policy developments, policy support has not and we think will not deviate significantly in the coming months from the incremental pace seen thus far in the current cycle," said Wang Tao at UBS.
Beijing will only relax nationwide property market controls as a "last resort", though some regions will continue to ease such curbs, she added.
Low inflation will continue to offer the government more room to maneuver its monetary policy if needed.
Annual growth in the consumer price index was seen steady at 2.3 percent in July, way below the annual target of 3.5 percent, the poll showed.
Factory-gate prices are expected to continue a downward trend, though the pace of decline is forecast to ease to 0.9 percent in July from 1.1 percent in June.
With questions surfacing over the health of domestic demand, investors may pay even more attention than usual to trade data due on Friday.
Exports in July likely grew 7.5 percent from a year ago, compared with an increase of 7.2 percent in June, while import growth was seen slowing to 3.0 percent from 5.5 percent in June.
That would produce a monthly trade surplus of $27 billion, down from June's $31.6 billion.
The poll also showed banks likely extended 727.5 billion yuan (US$118 billion) in new loans last month, slowing from June's 1.08 trillion yuan, while growth of M2 money supply is likely to have dipped to 14.4 percent in July from a rise of 14.7 percent in June.
(1 US dollar = 6.1631 yuan)
(Reporting by Aileen Wang and Koh Gui Qing; Editing by Kim Coghill)