Services at sound levels

Service industry activity last month was a silver lining, given the country's cloudy economic prospects.

While both the official and HSBC Purchasing Managers' Index readings for manufacturing signaled lackluster activity in July, the readings painted a brighter picture for the services sector.

The HSBC PMI for the services industry, released on Monday, was 51.3 in July, unchanged from June and slightly higher than the 20-month low of 51.1 in April.

The official non-manufacturing PMI reading, released by the National Bureau of Statistics on Friday, rose to 54.1 in July from 53.9 in June.

A reading above 50 indicates an expansion in activity, while one below 50 means contraction and both the PMI readings for manufacturing indicated lackluster activity in July.

China's GDP growth slowed in the second quarter, and despite a series of targeted stimulus measures recently, there is little possibility of it picking up any time soon given the global economic woes.

As manufacturing has weakened, the health of the service sector holds the key to employment, as services have overtaken manufacturing as the biggest employer.

Seen from the HSBC and official indexes, the service sector is more active than the manufacturing industries and some sub-indexes have shown signs of growing resilience in the service sector. For example, the HSBC sub-index for new orders rebounded to 52.3 from 50.5 in June, while the sub-index reading for new export orders in the official PMI rose to 53.1 from 50.4 in June.

However, the sub-index measuring input prices rose to 58.2 last month from June's 55.0 in the official non-manufacturing reading. Rising input prices will encroach on the profit margins of services companies.

The reduced activity in the real estate sector is also a drag on the service sector. Since it is impossible for the authorities to back off from regulations aimed at taking the heat out of the housing market, the real estate sector is unlikely to contribute much to service sector activity in the second half of this year.

However, the service sector will benefit from the country's plans to increase investment in railways, water conservation and infrastructure construction and its massive urbanization drive, which will offset the expected contraction in real estate activity.