Policies stabilize service sectors

China's service industries are slowly stabilizing as government policies gradually boost demand, analysts said after the release of new economic measurements on Friday.

The purchasing managers' index for the non-manufacturing sector dropped 1.1 points to 55.6 in July, according to the China Federation of Logistics and Purchasing.

A reading above 50 indicates business activities in non-manufacturing sectors are expanding from the previous month.

Top Chinese leaders have decided to boost domestic demand in the second half of the year by improving people's spending power, Cai Jin, the federation's vice-chairman, said in a statement on Friday.

"That will help service industries maintain stable and fast growth," Cai said.

Business expectations remain at high level of 63.9 points, according to the official figure, with confidence in IT, post, air transport and building industries surging above 70.

"The initial effect of earlier easing measures, the recent rebound of property sales and the still robust income growth are the factors behind the improvement of July's services demand," said Qu Hongbin, chief economist in China with HSBC.

A separate reading on China's non-manufacturing sectors, the HSBC China services PMI, picked up mildly to 53.1 in July from 52.3 in June, because of a gain of new business.

The official service PMI tracks larger and State-owned companies while HSBC's index mostly tracks smaller and private companies.

"The modest gain in HSBC services PMI, plus a modest improvement of reading in manufacturing sectors, suggest that the real economy is stabilizing at a subdued pace," Qu said.

The HSBC manufacturing PMI was 49.3 in July, up from 48.2 in June, which marked the largest month-on-month increase in 21 months.

The improvements have helped lift the employment index in HSBC's statistics to 51.4 in July compared to 50.7 in June and lead to a less sharp reduction of work backlog.

However, business expectations reported by HSBC dropped to the lowest level since December, and at 62.8 is the third lowest reading since the series began in November 2005.

"A meaningful turnaround of domestic demand is a key counterbalance to weakening exports," Qu said. "Clearly, Beijing is willing to do more to step up easing, and the possible drop of inflation to below 2 percent allows them to deliver one more rate cut in the coming months."

Yet cuts in the reserve ratio requirement and fiscal easing are likely to remain China's primary tools to support growth.

"We still expect a moderate growth recovery in the coming months, when easing measures should fully filter through," he said.

On Tuesday, China's top leaders reaffirmed stable growth as a priority and vowed to maintain fiscal and monetary policies to combat turbulent global conditions.

President Hu Jintao called for measures to expand domestic demand, which caused analysts to speculate more support to stimulate consumption.

The Ministry of Finance on Thursday announced the date for the expansion of value-added tax reform to eight provinces.

Eight cities will launch their reform to replace the business tax with a VAT in the modern service and transportation sectors to avoid duplicate taxation and lower their tax burden, with Beijing taking the lead on Sept 1.

China may also select certain industries to roll out VAT reform nationwide in 2013, said Kenneth Leung, a partner of tax and business advisory services at Ernst and Young. Such industries include transportation, building installation, and post and telecommunications, he said.

In contrast with the boom in service sectors, the rebound in the property market may not last long, said Chang Qing, a property market analyst with Homelink Real Estate.

"Although there has been a universal warming up in the sales volume of the housing market nationwide, some cities have already seen a retreat in that amount, which suggests that the housing demand is not sustainable amid ongoing regulations," Chang said.

"What's more, the local government has reiterated the tightening measures on the property market despite expectations of increasing housing prices, which may trigger further restrictions on the market," he said.