Call it a tale of two sectors -- China's slipping manufacturing and flourishing service sector have defined the country's economy.
The Chinese economy is undergoing heavy restructuring as it slowed to a six-year low of 6.9 percent in the third quarter this year.
Weighed down by overcapacity and debt overhang, manufacturing has seen growth slide from 7 percent in the fourth quarter of 2014 to 5.8 in the third quarter this year. In contrast, the service sector has accelerated to 8.6 percent in the third quarter, compared with 7.8 percent last year, according to J.P. Morgan, citing figures from the National Bureau of Statistics
But the service sector has not fully picked up the slack from manufacturing, leading growth of the world's second largest economy to continue to moderate in the coming years.
Consumption is expected to contribute 3.7 percentage points to GDP growth this year, compared with 2.7 for investment and 0.5 for net export, according to J.P. Morgan.
Part of the service growth has come from financial services. The stock market rally late last year drew new investors and fueled transactions. But the market gyration this summer reigned in growth, with J.P. Morgan now estimating the service sector as a whole will stabilize between 7.5 to 8 percent next year.
While economists say the stock market boom only provided a one-off boost to service growth, the sector's resilience against the backdrop of economic slowdown will continue to come from areas including health care, education, entertainment and public services.
Often categorized as 'other services', they have demonstrated robust growth and occupy 40 percent of the country's total service sector.
A good example is China's box office, which shot up 47.4 percent to 40 billion yuan as of Dec. 3 this year. It is set to overtake the United States as the world's largest film market in the next five years.
Traditional service sector growth drivers such as retail, transportation and catering, however, are experiencing a slowdown.
"The consumption pattern in China is shifting more toward discretionary spending such as entertainment and travel and less in staples like food and clothing as incomes grow," said Zhu Haibin, China chief economist at J.P. Morgan.
Despite the slowdown in headline growth, employment and residential income have so far remained largely intact. Income growth has been outpacing GDP growth over the past several quarters. So has household expenditures, according to the National Bureau of Statistics. Authorities have also vowed to double household income by 2020 from the 2010 levels.
The manufacturing sector is set to slow further as authorities tackle overcapacity and unwind high corporate leverage. Companies' debt-servicing capabilities have worsened as falling producer prices have strained their financial profile, which in turn reduced appetite for new investment.
Manufacturing investment, which accounts for about one-third of China's total fixed asset investment, slowed to 8.3 percent in the first ten months this year, compared with 13.5 for 2014. Property investment has posted an even sharper decline of 2 percent from 10.5 over the past ten months, the bank said.
There is a growing concern that the continued weakness in manufacturing will spill over to consumption if the de-leveraging process results in rising unemployment and hurts income growth.
But Zhu said that concern has been overstated. China's labor market has changed dramatically from what it was back in the 1990s, when reform of the country's state-owned firms left many people jobless.
"In the 1990s, entrenched state owned enterprise workers were not able to re-enter the job market, as the new cheap labor supply was nearly infinite," Zhu said.
But the country's working age population has begun to decline since four years ago and new jobs are mostly being created within the service sector.
"This suggests the sector is no longer secondary to manufacturing and can grow in a self-sustaining manner," Zhu said.
