Service sector offsets weak factory output

HSBC data prompt economists to urge more policy easing

Steady growth in China's service industry looks to have helped counter the weakening in manufacturing activity during 2014, increasing policy makers' confidence to accelerate structural reforms this year, analysts said.

The country's average official manufacturing Purchasing Managers Index was 50.7 last year, which illustrates the sector's near-stagnation; but in comparison, the average services PMI reached 54.4, supported by fast expansion of new business and stronger employment levels.

The latest figures from banking giant HSBC Holdings Plc released on Tuesday appeared to mirror that trend, showing a rise in its December China Services PMI to 53.4 from 53 in November, as new businesses expanded fast.

Stable development of the service sector also modestly improved last month's employment index, said HSBC, as the manufacturing sector continued to struggle.

"It provided a counter balance to the downward pressure in the economy," said Qu Hongbin, HSBC's chief economist in China and co-head of its Asian Economic Research.

"We continue to believe there is insufficient demand in the overall economy and more easing measures are warranted in the coming months."

The bank has already released its December manufacturing PMI, which showed a reading of 49.6, down from 50 in November, the first deterioration in operating conditions since May. New orders also contracted for the first time since April 2014.

The official PMI readings have already confirmed a further slowdown in the manufacturing sector at the end of 2014, but stronger economic activity in the service industry.

The manufacturing PMI fell to 50.1in December, the lowest reading since July 2013, down from 50.3 in November and 50.8 in October, led by falls in new orders and output, according to the National Bureau of Statistics.

Chang Jian, chief economist in China at Barclays' Capital, said that continued declines in input prices represented inflationary risks which are hurting investment in the manufacturing sector and are likely to result in falling corporate profits.

The December services PMI released by the NBS climbed to 54.1, a four-month high, up from 53.9 in November and 53.8 in October.

As the service sector continues its rapid expansion, Zhao Qinghe, a senior economist at the NBS, said it has become a driving force behind the overall economy, which is now steadily adjusting to what the government calls a "new normal" of slower economic growth.

Wang Tao, chief economist in China at UBS AG, expects the upcoming December data "to show a still-frail economy, tepid production momentum, and mounting deflationary pressures".

She is expecting GDP growth to have slid further from the third quarter's 7.3 percent year-on-year to 7.1 percent in the fourth quarter, taking full year growth to 7.3 percent.

The NBS will release the December and full-year economic indicators on Jan 20.

Lian Ping, chief economist at Bank of Communications Co Ltd, is forecasting that GDP growth will be 7.2 percent in 2015, slightly lower than growth in 2014.

"As China undergoes economic restructuring, secondary industries will account for a smaller proportion of the economy and the lack of industrial demand will cause price drops in raw materials," Lian said.

He is also predicting that the Producer Price Index will see significant negative growth in the first half of this year, but the decline will slow down in the second half.