China's Services Sector Expansion Fails to Offset Manufacturing Decline

China's services sector expansion in June failed to abate low-growth concerns as the pace of growth was modest.

Markets fear there will be a continual contraction in the manufacturing sector.

Two separate Purchasing Managers Indices (PMIs) for the services sector showed readings above the watershed line of 50, which separates expansion from contraction. Nevertheless, the growth in the sector was not strong enough to offset a decline in manufacturing activity.

The headline services PMI published by the National Bureau of Statistics (NBS) declined to a 9-month low of 53.9 in June from 54.3 in May. Meanwhile, the Markit/HSBC PMI inched up to 51.3 from 51.2 in May.

"The slight drop in the services sector was mainly caused by a seasonal fall in the construction industry," Cai Jin, a vice president at the China Federation of Logistics and Purchasing (CFLP), said in a statement. CFLP conducts the official survey along with NBS.

The sub-index for construction fell to 59.3 from 62.2 in May, according to the NBS.

HSBC attributed the sluggish growth in China's services sector to new orders that grew at their weakest pace in more than four years. The HSBC China Composite PMI, which covers manufacturing and services, declined to 49.8 in June from 50.9 in May, the first contraction of output in ten months.

"The underlying growth momentum is likely to be softening for services sectors, along with the slowdown of manufacturing growth," Qu Hongbin, HSBC's China chief economist, said in a statement.

"With sluggish growth of new orders, employment growth is under pressure. As Beijing's VAT reforms are likely to take time to filter through, we expect slower growth in service sectors in the coming months."

Earlier, the official and HSBC PMIs for the manufacturing sector showed declines in June, adding to fears that the world's second-largest economy is slowing down. The official PMI fell significantly to 50.1 from 50.8 in May, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. The measure from HSBC and Markit Economics was at 48.2, the weakest since September and down from the previous month's reading of 48.3.

The sluggish growth of the services sector, which accounted for 46% of China's gross domestic product in 2012, is likely to worsen investor fears that China's economic slowdown is deepening. Earlier, Goldman Sachs Group, China International Capital, Barclays and HSBC Holdings lowered their China growth projections this year to 7.4%, below the government's 7.5% goal set at a March.

Investors are calling for the People's Bank of China to cut its policy interest rates by at least 25 basis points in the near term to stabilise the decelerating economy.

Nevertheless, the Chinese leadership are prepared to tolerate the slower economic expansion as they are of the view that officials should not be judged solely on their record in boosting gross domestic product, according to the official Xinhua News Agency. Instead, the ruling Communist Party is likely to focus on improving people's livelihood, social development and environmental quality, Xinhua noted.