China's Services Sector Growth Slows to Nine-Year Low: HSBC and Markit Survey

China's services sector growth has slowed, largely due to persisting weakness in the property market.

The results of a survey, compiled by HSBC and Markit, showed that China's services purchasing managers' index (PMI) plummeted to a near nine-year low of 50.0 in July from a 15-month high of 53.1 in June.

Meanwhile, a government-compiled services PMI for the non-manufacturing sector has eased to a six-month low of 54.2 in July from 55 in June, logging its weakest reading since January.

A reading above the 50 threshold demarcates expanding activity from a contraction.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "...Both the new business and outstanding business indices declined from their levels in June.

"The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property related activity, such as agencies and residential services, see less business. Meanwhile, the employment and business sentiment indices remain stable. In the coming months, we think the service sector may get some support from the recovery in investment.

"But today's data points to the need of continued policy support to offset the drag from the property correction and consolidate the economic recovery," Hongbin added.

Cai Jin, vice-president of China Federation of Logistics & Purchasing, which publishes the services PMI in conjunction with the Chinese government, asked investors not to read too much into the divergence.

"The volatility in the various sub-indices for the July services PMI was not great. The market in general is still stable."

Bill Adams, senior international economist for PNC Financial Services said in a note: "...The HSBC manufacturing PMI is at an 18-month high in July, while the services PMI is nearly its lowest in a decade. So which is it, hot or cool? Could it be both?

"The government-compiled CFLP non-manufacturing PMI also retreated in July, while the CFLP manufacturing PMI rose. The HSBC PMIs are beloved by analysts who lean sceptical toward official data, but in July, at least, public and private surveys tell very similar stories.

"The July surveys could mean that the industrial sector is benefiting from stimulus while the housing correction continues. On the other hand, such diverging messages could just be noise.

"The huge drop in the July services PMI is so surprising, during a period when policy is known to have become more expansionary, that the odds of a false signal are probably higher than usual.

"In any case, it is the manufacturing PMI that markets historically took as a good proxy for the overall business cycle, and that relationship seems to have broken down in the last two years - maybe the services PMI is off too?

"July's services PMI took a big drop - so big a drop that it is hard to know how seriously to take the number. Whatever the ultimate explanation, July's activity indicators are now likely to have more market-moving potential than usual, since the message from the month's surveys is so muddled."

The services sector accounted for 45% of China's 2012 GDP and about half of all jobs in the world's second largest economy that year.