China is reaching its tipping point

A few days after the launch of the FTZ, the Chinese mainland went on holiday for a week to mark national day. This holiday during the first week of October likely helped the services portion of the economy continue to grow after reaching a six-month peak in September. As it turns out, the number of tourists hit a record.

There were so many tourists that much of the feedback was negative, with many complaining that the more popular sites around the country were overcrowded, hotels were full and restaurants operating beyond capacity.

Despite the growth and the emergence of services as the largest single contributor to the country's GDP, the sector remains relatively underdeveloped in China, which has long focused on manufacturing as an engine of growth.

Premier Li Keqiang has been vocal in advocating the growth of services. Speaking in May, he said that increasing the availability and quality of the country's service industries "will help unleash huge potential in domestic demand and thus offer firm support for stable economic growth and structural optimization".

He continued: "China will further open up the service industry and pilot free trade experimental zones to tap development."

The most recent numbers suggest services could be key for China to reach its growth targets.

The service sector in China grew faster in September than it has in the past six months, even as growth in other areas remains slack because of weak demand both at home and abroad.

The official Purchasing Managers' Index (PMI) for the non-manufacturing sector rose to 55.4 in September from 53.9 in August, the highest reading since March. A number above 50 represents growth.

"The index reflected strong growth in consumption services represented by retail thanks to the holiday factor in September," said Cai Jin, vice-chairman of the China Federation of Logistics and Purchasing, which compiles the numbers along with the National Bureau of Statistics. "It also showed that the restructuring policies had boosted demand in the service sector."

The HSBC/Markit Services PMI, which came out on Oct 8, painted a slightly different picture, coming in at 52.4 for September compared with 52.8 in August as both manufacturers and service providers raised their prices in response to higher costs.

The service sector continues to grow, but the growth is increasingly subdued.

"Combined with the gradual improvement of the manufacturing PMI, the Chinese economy is still on the way to modest recovery. But a more consolidated and sustainable recovery requires structural reforms," said Qu Hongbin, chief economist for China and co-head of Asian economic research at HSBC.