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HSBC China Services PMI (Dec) Still Holding up:Report

01-05 14:23 Caijing

At 52.5.As monetary easing and tax cuts measures gradually filter through, growth momentum should start to improve into 2Q.

December’s headline HSBC China services PMI remained unchanged at 52.5. With external demand still cooling and the property still in correction, expect more headwinds down the road. However, as monetary easing and tax cuts measures gradually filter through, growth momentum should start to improve into 2Q.

Facts

December’s headline HSBC China services PMI remained unchanged at 52.5, the lowest level in three months and below the series’ long term average of 56.9. The headline result is based upon results collected for a single question asking respondents to report on the actual change in business activity compared to the previous month.  

Details within the survey suggest a downward move in all the sub-indices. New business flows hit a four-month low of 52.6 in December from 53 in November. The continuous slowdown of new business inflows reduced the level of outstanding business, which returned to contraction territory at 49.3, compared to 50.5 in November and the series’ long term average of 48.6. Consequently, the pace of new job creation also slowed to a four-month low of 51.4, notably lower than November’s 52.7 and the series’ long term average of 53.3. Business expectations, though still well above 50, dropped to 60.9 (its lowest since the series started in November 2005) in response to the effect of ongoing property tightening measures.

Disinflationary forces intensified. The input price sub-index fell to a 25-month low of 53.3 in December (vs. 53.8 in November), well below the series’ long term average of 54.6, while the prices charged sub-index dropped to 49 in December, reversing twenty three consecutive months of price increases.  

Implications

China’s service sectors saw slower but still steady growth towards the end of 2011. The moderation of the Nov-Dec average for China’s services PMI period to 52.5, from 53.5 for the Sept-Oct period suggests that the pace of slowdown remains modest. Moreover, December’s PMI remains in line with 2011’s annual average of 52.7. As such, we expect the growth rate of China’s services sector GDP (representing around 43% of China’s GDP) to average 8.5-9% in the coming quarter.

The risk facing China’s services sectors is likely to the downside in the near term, due to the continued weakness of the manufacturing sector, slower job growth, cooling external demand and ongoing property correction. China’s property sector has entered a harsh winter. With property tightening unlikely to be relaxed any time soon, further correction is inevitable following the recent sequential decline in property prices (based on an index for 70 big cities) and contraction of property floor space sales (on an annul basis). This will surely weigh upon sentiment within China’s services-related business, though the direct impact on consumer spending should be limited given the low leverage levels of Chinese households.

Looking ahead, it will likely take at least a few months time before easing measures start to filter through meaningfully.

On the monetary front, we expect quantitative easing in the form of at least three reserve ratio cuts in the coming six months, with disinflationary pressures building for both manufacturing and services sectors. This should improve the liquidity conditions and support growth.

On the fiscal front, tax reduction measures kicked off from January 2012, providing help in particular for small business.  In addition to the increased threshold for VAT and business taxes small companies (which took effect 1 November 2011), new measures in 2012 include:

> Trial value-added-tax (VAT) reform for transportation and six services sectors in Shanghai

> Exemption of 22 types of administrative fees for small and micro-sized companies over 2012-2014

> The income tax rate for small companies with an annual taxable income below RMB60,000 (equivalent to USD9,430) will be halved from 2012-2015.

Bottom line: The growth of China’s services sectors has slowed, but remains steady. It will continue to face headwinds in the near term, but should regain momentum once the impact of Beijing’s easing measures start to filter through.

QU Hongbin -Co-head of Asian Economics Research
SUN Junwei - China Economist


Chart1. Services sectors saw slower but still steady growth

Chart2. More headwinds from the ongoing property market correction

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