Growing service sector won't avert China slowdown

BY ADAM ROSE AND XIAOYI SHAO

BEIJING Thu Apr 3, 2014 2:40am EDT

(Reuters) - A robust services sector will not stop China's economy from slowing into the middle of the year, analysts said after modest government stimulus was seen as a signal authorities want to steady growth to keep their reform drive on track.

Two surveys on Thursday showing growth in the service sector offered some relief after a run of disappointing data this year, but did little to alter the view that the world's second-largest economy has lost more momentum than expected in 2014.

On Wednesday, the government said it would accelerate construction of rail projects and cut taxes for small firms, the first concrete action this year to boost activity.

"The scale of the stimulus is modest, likely aimed at smoothing GDP growth at around the 7.5 percent target, rather than another round of massive stimulus," HSBC economists said in a report.

The targeted moves showed authorities wanted to stop growth falling below 7 percent without undermining efforts to reshape the economy, the economists said.

"This should buy time to implement reform measures, which could involve some short-term pain."

SERVICES GROWING

The official services Purchasing Managers' Index (PMI) dipped to 54.5 from February's 55.0, but still held well above the 50 level that divides expansion and contraction.

The Markit/HSBC Services PMI rose to 51.9 in March from February's 51.0.

"The data shows that China's non-manufacturing industry still maintained a relatively fast growth rate," said Cai Jin, a vice president at the China Federation of Logistics and Purchasing, which compiles the official PMI, said in a statement.

That contrasts with a run of weaker indicators this year. On Tuesday, two surveys showed manufacturing struggled in March, with activity at smaller, private firms contracting for a third month, and exports unexpectedly dropped in February.

"What we've got in China is pretty much what have everywhere in North Asia, which is ... certainly not the export growth we were used to before. And that's spreading to manufacturing," said Tim Condon of ING.

RESHAPE ECONOMY

The government wants to reduce the economy's dependence on exports and enhance the role of consumption, although it is unclear how much growth it might be willing to sacrifice.

Services made up 46.1 percent of gross domestic product in 2013, having overtaken manufacturing as China's biggest employer in 2011.

"We think (services) will continue to play a bigger role in driving China's economic growth this year as the government is trying to rebalance the economy while letting the service industry to generate more employment," said Zhang Yiping, an economist at China Merchants Securities in Shenzhen.

Finance Minister Lou Jiwei has said a healthy labor market was more important than reaching the government growth target. Employment is a priority for China's leaders, because it helps them maintain social stability.

Both service-sector PMIs showed the rate of jobs growth increasing, while Tuesday's Markit/HSBC manufacturing PMI showed a fifth successive contraction in the employment sub-index.

"We expect manufacturing will catch up later as the sector's peak season is coming and the government has started to shore up the economy," said Shen Lan, an economist at Standard Chartered in Beijing.

"We expect the economy will stabilize in the second quarter of this year and pick up in the second half," Shen said.

(Editing by John Mair)