BEIJING Activity in China's services sector defied the country's economic cool down to expand modestly in July, a private survey showed on Monday, as new business orders recovered from a multi-year low in a rare sign of resilience.
But that was tempered by a fall in prices charged by companies to a nine-month low, suggesting demand was still too weak for them to raise prices, and as business expectations hovered near their lowest since 2005.
The HSBC/Markit Purchasing Managers' Index (PMI) for the services industry stood at 51.3 in July, unchanged from June and just a whisker above a 20-month low of 51.1 struck in April.
A reading above 50 suggests business grew compared to a month ago, while an outcome below 50 points to contraction.
China's economy is set to grow this year at its weakest pace since 1990 as flagging foreign and domestic demand weighs on exports and factory production. A slowdown in investment has further dragged on growth.
"China's service sector has stabilized at a relatively low level of growth," said Qu Hongbin, an economist at HSBC.
"But profit margins continue to be squeezed. Without a sustained improvement in demand, services growth is likely to remain lackluster, putting downside pressures to employment growth."
The sub-index for new orders rebounded to 52.3 from June's reading, which was the lowest in over four years.
Financial markets have grown increasingly nervous about China's economic health despite reassurances from Beijing that the world's second-biggest economy is on track to meet its 7.5 percent growth target this year.
Crucially, services companies are the biggest employers in China, at a time when the government is worried the downturn could threaten social stability by driving up unemployment as it tries to shift the economy away from a focus on manufacturing.
A similar, official survey released on Saturday showed the non-manufacturing sector picked up in July as support measures for small firms helped improve sentiment, though companies noted inflation was picking up and pushing up costs.
The government's non-manufacturing purchasing managers' index (PMI) rose to 54.1 last month from June's 53.9.
A pair of PMI surveys of Chinese manufacturers last week showed factory production was slightly stronger than expected in July among larger Chinese manufacturers. Smaller factories, however, remained under pressure.
"I am more worried about manufacturers. I don't think the worst is over," said Zhang Zhiwei, a Nomura economist in Hong Kong.
He said the services sector was holding up better than manufacturing as it was not saddled with excess capacity and debt and was supported by demand intrinsically less volatile.
"Policy will continue to be tight and growth will continue to slow in the second half of the year," Zhang said.
The HSBC survey showed the employment sub-index slipped in July, although it remained above a four-year trough touched in April.
HSBC said 6 percent of survey respondents increased their payrolls, with a particular focus on hiring graduates. In contrast, 2 percent of companies had shed jobs.
The services sector accounted for 46 percent of China's economy in 2012, so a sharp slowdown in the industry would exacerbate concerns about slackening economic growth.
Services firms created 35 percent of all jobs in China in 2011, overtaking manufacturers who accounted for 30 percent of hiring.
(Reporting by Koh Gui Qing; Editing by Kim Coghill and John Mair)