BEIJING, Aug 5 (Reuters) - Activity in China’s services sector defied the country’s economic cooldown and expanded modestly in July, a private survey showed, as new business orders recovered from a multi-year low in a rare sign of resilience.
But the show of strength was tempered by a fall in prices charged by companies, suggesting demand was still too weak for firms to raise prices, which hit a nine-month low in July.
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 at risk of posting its weakest annual growth in over two decades this year as flagging foreign and domestic demand weigh on exports and factory production. A slowdown in investment has further dragged on growth.
“China’s service sector has stabilised 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 lacklustre, putting downside pressures to employment growth.”
The sub-index for new business orders rebounded to 52.3 from June’s reading, which was the lowest in over four years. Anecdotal evidence suggested the rise in new orders was driven by stronger demand, HSBC said.
But companies remained guarded in their expectations of new business in coming months due to fragile economic conditions. The sub-index for business expectations hovered near lows unseen since records started in 2005.
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. If achieved, the rate of growth would be the worst since 1990.
A similar, official survey released on Saturday showed growth in China’s non-manufacturing sector picked up in July as Beijing’s recent support measures for small firms helped improve sentiment, though companies noted that inflation is 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.
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 Chinese economic growth.
Crucially, services companies are also the biggest employer in China, at a time when the government is worried that the economic downturn could threaten social stability by driving up unemployment.
Services firms created 35 percent of all jobs in China in 2011, overtaking manufacturers who accounted for 30 percent of hiring.
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, were shown to have remained under pressure.