Jun 04, 2015

    Rosy services sector brings some cheer to China


    ACTIVITY in China's services sector accelerated last month as new business rose at the fastest pace in three years, a private survey showed yesterday, a rare piece of good news for policymakers struggling to revive a cooling economy.

    Still, economists remain cautious on China's overall economic outlook, as credit growth remains weak and manufacturing stagnates, reinforcing views that the authorities will have to roll out more stimulus to avert a sharper slowdown.

    The headline HSBC/Markit Purchasing Managers' Index (PMI) for last month was 53.5, up from 52.9 in April and well above the 50-point level that separates expansion from contraction.

    Last month's figure represented the fourth straight month of acceleration. The new business sub-component was at 54.4, up from 52.8 in April and the highest reading since 54.7 in May 2012.

    Employment at services firms grew at the fastest rate since January 2013, the survey showed, another encouraging sign for policymakers as layoffs continue in the manufacturing sector, China's traditional jobs engine.

    A news release did not give specific reasons for the strong pick-up in business last month.

    In April, some services companies attributed part of the increase in new business to the strong stock market, which hit a seven-year peak that month.

    Economists have been mostly sceptical that a rising stock market will do much to directly boost consumption, but do see the boom easing financing costs for some small and medium-sized private firms, many of which are in the services sector.

    "In China, the benefit of a strong stock market does not come from the wealth effect on consumption, as China's marginal propensity to consume is very low and Chinese households only hold about 5 per cent of their total assets in stocks," wrote Mr Chi Lo, economist at BNP Paribas, in a note.

    "Rather, the gain mainly comes from the reduction of equity financing cost, which should help ease the financial constraints on small and medium-sized (private sector) companies."

    Still, the buoyant equities market is a windfall for many financial services firms and companies which sell to them.

    Another piece of good news was the pricing sub-components of the PMI, which showed that both the input and sales prices rose modestly last month, reversing a three-month decelerating trend which had resulted in prices charged falling outright in April.

    Nonetheless, input prices rose faster than sales prices, suggesting companies were still facing deteriorating margins.

    Companies surveyed cited recovering oil prices and higher staffing costs as key factors behind rising costs.

    The services sector has accounted for the bigger part of China's economic output for at least two years, with its share rising to 48.2 per cent last year, compared with the 42.6 per cent contribution from manufacturing and construction.

    An official services survey released on Monday also showed that activity expanded last month, but at a slower pace, raising fears that the sector was slowly succumbing to the broader economic slowdown.