PMI points to weaker service conditions

Activity in China's service sector expanded at its slowest pace in two-and-a-half years in January, suggesting weaker demand during the first month of 2014, a private survey showed on Friday.

HSBC Holdings Plc released the Purchasing Managers' Index for services, which eased to 50.7 in January from 50.9 in December.

The official PMI for the service sector — calculated by the China Federation of Logistics and Purchasing and National Bureau of Statistics — was at a five-month low of 53.4 in January, down from 54.6 a month earlier.

For both PMIs, a reading above 50 indicates expansion.

Growth of new orders in the service sector slowed moderately as demand weakened last month, according to the HSBC data. The figures also indicate that service providers' costs rose at the start of the year.

The slower expansion of service activity in January reflected soft manufacturing growth and the impact of the government's latest measures to curb official extravagance, said Qu Hongbin, chief economist in China and co-head of Asian economic research at HSBC.

"As business sentiment remains stable, we expect service growth to bounce back a little in the coming months," he said.

"Yet a meaningful improvement relies on stronger growth of manufacturing and the implementation of reforms to boost the service sector."

The manufacturing PMI, released earlier by the NBS and CFLP, slid to 50.5 in January — the lowest level since August — compared with 51 in December and 51.4 in November.

The HSBC manufacturing PMI for January cooled to a six-month low of 49.5, a level indicating contraction, from 50.5 in December and 50.8 in November. It was the first time since August that the reading dropped below 50.

Other indicators, including industrial output, retail and fixed-asset investment, also weakened at the end of 2013.

Wang Tao, chief economist in China at UBS AG, characterized the current economic situation as "a seemingly soft start" for 2014.

"We anticipate the January data to show that economic momentum may have softened slightly, due in part to Chinese New Year distortions," she said.

Wang said China's relatively warm winter likely helped keep food prices and consumer inflation subdued and power use weaker in January.

Zhu Haibin, chief economist in China at JPMorgan Chase & Co, said: "In the near term, the volatility in the financial market adds to the concern about economic slowing.

"The first thing to watch for whether the upward drift in interbank rates and higher volatility will be passed through to ultimate borrowers in the business sector."

He mentioned other factors that will constrain growth momentum in the coming months, including lingering manufacturing overcapacity, tighter local government financing conditions and a slowing in the housing market.

However, the chief China economist at the Royal Bank of Scotland, Louis Kuijs, said there is no need to become "overly concerned" about growth in China.

"The government has the policy space it needs to ensure its bottom line on growth while retaining financial stability.

"We will also pay attention to how policymakers balance the need to rein in credit growth and the excesses in shadow banking with the desire to keep GDP growth above the bottom line of about 7 percent," Kuijs said.