Sector will help tackle slowdown in manufacturing, experts say

The service industry has shown persistent growth and may help counteract a recent slowdown in manufacturing, business leaders said.

The Purchase Managers' Index, a key gauge of factory output, also indicates activity in the non-manufacturing sector. That index surged to 56.3 last month from July’s 55.6, according to data released on Monday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing.

Related readings: Non-manufacturing PMI China Aug manufacturing PMI hits new low: HSBC China Aug manufacturing activity worsens: HSBC

The NBS reported on Saturday that, due largely to a protracted export slump, the manufacturing PMI fell from 50.1 in July to 49.2 in August, the lowest since November 2011.

But the non-manufacturing PMI has been above 50 since March 2011.

A reading above 50 signals expansion and one below that number indicates contraction.

GDP growth may fall below 7.5 percent year-on-year in the third quarter, compared to 7.6 percent for the second quarter, warned Wang Jun, a senior economist with the China Center for International Economic Exchanges, a government think tank.

The second quarter’s growth was the lowest for three years. The economy won’t begin to bottom out until the fourth quarter of the year, Wang said.

Although the non-manufacturing sector showed robust growth, reducing some of the economy’s downside risks, it cannot, Wang argued, reverse the slowdown in manufacturing.

The economic situation will remain "severe" during the next couple of months, Wang said, but the annual GDP growth target of 7.5 percent was possible.

But the risk of missing the target is increasing, economists said."With no easing moves in the past month, authorities seem to be running a risky experiment to see how well the economy can hold up without any big dose of stimuli," said Yao Wei, an economist with the Societe Generale SA.

"The government still has to adopt at least some of the old prescription of infrastructure investment to prevent the economy from a complete crash," said Yao, who predicted the central bank will guide interest rates lower.

The persistent growth of the service sector is helping to counteract the slowdown in manufacturing.

"The non-manufacturing sector is playing a more important role in stabilizing the economy," said Cai Jin, vice-chairman of China Federation of Logistics and Purchasing. The survey for the non-manufacturing PMI covers 1,200 companies from 27 industries.

"For the catering industry, the growth of sales revenue has been quite obvious with consumption being stimulated by the government," said Franco Chong, general manager of Happy Lemon International, a teahouse chain in Shanghai.

Happy Lemon has seen annual increases of 30 to 40 percent on sales revenue in the past three years and expects to maintain that growth in the next five years.

Alongside the government PMIs, the HSBC also compiles its own manufacturing PMI, and its latest report was released on Monday. It fell from 49.3 to 47.6 in a month, and reached its lowest reading since March 2009 — a decline of 10 consecutive months.

Qu Hongbin, chief China economist with the bank said, the government may need to take away more of its policy-level controls on the economy because successive contraction in employment conditions may translate into increasing difficulties ahead.

Shrinking manufacturing has also hurt many services. Jiang Kexing, manager of Zhejiang Hongxu International Transportation Agency, a logistics company based in Yiwu city, said his company saw a 40-percent drop in profits in the first six months of this year compared to last year.

The Shanghai Composite Index, which tracks the biggest listed companies in China, rose 0.6 percent to 2,059.15 at the close on Monday. But it retreated 2.7 percent in August, a fourth straight month of decline.

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chenjia1@chinadaily.com.cn and yuran@chinadaily.com.cn