UPDATE 1-China PMI reports underscore case for policy easing

Wed Jul 4, 2012 8:03am IST

* HSBC services PMI shows weakest growth in 10 months

* New order growth cooled, job creation capped

* Combined with factory PMIs shows pressure on jobs market

* HSBC PMI shows some evidence demand is muted

By Nick Edwards

BEIJING, July 4 (Reuters) - China's services firms grew at their slowest rate in 10 months in June, easing back from May's 19-month peak, as new order growth cooled albeit while marking 43 months of consistent expansion, a private sector survey showed on Wednesday.

The China HSBC services purchasing managers index (PMI) stood at 52.3 in June, down from 54.7 in May, indicating a marginal expansion of activity that capped job creation at a three-month low and bolstering expectations that Beijing will deliver further policy measures to boost growth.

"Services activities softened in June due to slowing new business flows, which translated into only marginal growth of employment," Qu Hongbin, the Hong Kong-based chief China economist at survey sponsor, HSBC, said in a statement.

"This, plus the ongoing slowdown of manufacturing sectors, points to growing pressures on the jobs market - the last thing Beijing policy makers want to see. But with inflation also falling fast, we believe Beijing has sufficient room to step up easing and revive domestic demand," Qu said.

The HSBC index, compiled by UK data provider Markit and tracking smaller firms mainly in the private sector, completes the series of China PMI releases for June that broadly leave investors anticipating more policy easing in the near future.

Two surveys of China's vast manufacturing sector earlier in the month showed factory activity fell to a seven-month low in June, dampened by both external and domestic weakness.

China's official services PMI, released on Tuesday, rose to 56.7 to suggest the sector was expanding at its fastest pace in three months.

The difference between the competing indexes is a result of using differing methodologies and samples.

Chinese policymakers surprised markets in June with a 25 basis point cut to borrowing rates, bringing the official one-year lending rate down to 6.31 percent in the wake of a slew of deteriorating data.

An outright interest rate cut had not been the market consensus. Instead, economists had expected Beijing to continue a programme of reducing the required reserve ratio (RRR) of banks - a further cut to which many investors believe could come later this month as data on the second-quarter is published.

China has lowered the RRR, or the amount of cash banks must keep in reserve, in three 50-basis point steps since November 2011, freeing up an estimated 1.2 trillion yuan ($190 billion) for fresh lending. The last cut was in May.

On the fiscal front, Beijing has fast-tracked investment projects and rolled out new incentives to spur consumer spending on energy-efficient products, but studiously avoided any hint so far of putting together a repeat of the 4 trillion yuan fiscal spending package rolled out during 2009-10 during the global financial crisis.

WANING CONFIDENCE

China's fast-growing services industry - accounting for about 43 percent of economic output - has so far weathered the global slowdown much better than the factory sector.

Relatively robust readings of both services indexes reflected long-term optimism businesses would benefit from the gradual rebalancing of economic activity towards services and consumption.

The China HSBC services PMI has been above 50 - demarcating expansion from contraction - in every month since the index was first issued in November 2005.

But signs of waning confidence near term are emerging.

The China HSBC services new business sub-index hit an 11-month low of 52.2 in June, with the proportion of survey respondents reporting an increase in business activity barely outpacing those reporting a decrease on the previous month, at 16 percent and 14 percent respectively.

"Confidence in the one-year business outlook remained below-trend, with panellists expressing concerns regarding the future path of economic growth," Markit said in a statement.

"The index measuring trends in overall new work was at a 10-month low. Anecdotal evidence provided by survey respondents suggested that reduced new order intakes reflected muted demand conditions," the statement added.

A third consecutive monthly reading below 50 in the prices charged sub-index underscored the softness of demand, as did a sharp fall in the input price sub-index.

But easing price pressures are seen by economists as positives, implying the central bank has room to ease monetary policy without igniting inflation risks - a key worry for Beijing which is obsessed with managing the impact of rising costs on social stability especially this year when the Communist Party will change its senior leadership.