Service industry serves up expansion

China's service sector expanded in September at the fastest pace since May, according to a private survey.

That suggests the country's economic conditions have improved, analysts said, although the prospects for a recovery in economic growth remain dim.

The HSBC services sector Purchasing Managers' Index, which was released by HSBC Holdings Plc and Market Economics on Monday, showed its largest increase since September 2011, reaching 54.3. It had been 52 in August.

A reading above 50 indicates expansion and below 50 means contraction.

The expansion "is likely a sign of a gradual improvement in domestic economic conditions, which is the result of previous easing measures and the stronger demand in the run up to the Golden Week holidays," Qu Hongbin, Hong Kong-based chief China economist for HSBC, said in a statement.

Additional easing will be needed to achieve a "meaningful turnaround", he said.

The HSBC survey showed that the number of new orders accepted by service companies increased at its fastest pace in four months in September. Service sector companies also indicated they had employed more people that month and seen the price of their various inputs increase at a faster pace.

"Industrial activity is still in a trough but is showing signs of improving," said Percy Chan, general manager of Bank of East Asia Ltd's wealth management department. "These indices will continue to rebound in October."

Lu Zhengwei, chief economist at Industrial Bank Co Ltd, said it is unclear if the service industry has truly experienced a strong rebound. Another purchasing managers' index reading, released on Oct 3 by the National Bureau of Statistics and China Federation of Logistics and Purchasing, fell to 53.7 in September from 56.3 a month before.

The two indices looked at different sample pools and employed different methods. Service industries constitute about 43 percent of China's economy.

The country's manufacturing sector, another pillar of the economy, is still contracting. HSBC's Purchasing Managers' Index for manufacturing registered 47.9 in September, slightly higher than August's 47.6.

Another survey by the National Bureau of Statistics reported China's Purchasing Managers' Index for manufacturing to be 49.8 in September, 0.6 percentage point higher than in August.

Lu said the biggest difficulty Chinese industries now face is overcapacity, which won't go away unless a large stimulus package is adopted.

"But this (a large scale stimulus package) seems unlikely, which means we have to be realistic about China's economy for now," Lu said.

On Wednesday, the Asian Development Bank adjusted its forecast for China's GDP growth this year to 7.7 percent, down from 8.5 percent.

Rhee Chang-yong, chief economist at the bank, said China cannot blame the slowdown simply on external influences such as the eurozone's debt troubles.

"In China, the investment slowdown and the end of the real estate boom have had a big effect, and that's good," he said.

China's growth decreased to a three-year low of 7.6 percent in the second quarter. A Bloomberg News survey predicted the economy may have expanded by 7.4 percent year-on-year in the three months leading up September.

zhengyangpeng@chinadaily.com.cn