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Corporate Aug 3, 2012

India, China service sectors counter downturn

Beijing/Bangalore: The services sectors in emerging powerhouses India and China grew in July at a healthy pace, providing vital support for the two economies as their manufacturing sectors struggle with the global downturn.

China's official purchasing managers' index (PMI) for the services sector fell to 55.6 in July from 56.7 in June, while a similar private-sector survey sponsored by HSBC headed in the opposite direction, rising to 53.1 from a 10-month low in June of 52.3.

Fighting downturn. Reuters

India's non-manufacturing PMI from HSBC was little changed, slipping to 54.2 in July from 54.3 in June.

With all the PMIs above 50-a threshold that divides expansion from contraction-the surveys are signalling that the services sectors in both China and India are expanding.

In China's case, the fall in the official index was "significant", said Dariusz Kowalcyzk, an economist with Credit Agricole-CIB in Hong Kong.

"However, the 55.6 points level is relatively high, and much better than in the case of manufacturing PMI. It is consistent with solid growth of the services sector, which will put a floor under the whole economy," Kowalcyzk wrote in a client note.

China's fast-growing services industry has so far weathered the global slowdown much better than the country's vast factory sector. The services PMIs have consistently signalled healthy expansion, with the official version hitting a 10-month high in March and the HSBC survey reaching a 19-month high in May.

Two surveys this week on China's manufacturing industry showed PMI readings around 50. Combined, they signalled that growth was stalling or close to stalling for a sector that has been the backbone of China's rise to the world's second biggest economy, after the United States.

HSBC's India manufacturing PMI for July fell to 52.9 from 55.0. It also showed overseas orders for Indian goods fell for the first time in nine months, reflecting the drag on global demand that is hitting all of Asia's exporters.

But even though that index was at its lowest since November, the July number pointed to a relatively healthy pace of growth.

Steady pace

Government figures on manufacturing are less flattering, suggesting factory activity is barely growing. Factory output rose 2.5 percent in June from a year earlier, but that followed two straight months of falls, Thomson Reuters data shows.

It is India's service sector that clearly is providing some encouragement.

"Service sector activity grew at a steady pace in July, with growth in new orders and employment holding up," Leif Eskesen, an economist at HSBC, said of India's services PMI.

The Indian survey showed service sector order books grew at the same clip as in June, prompting businesses to increase their workforces at a similar pace to that of the previous month.

The Indian services PMI did show that firms' confidence is falling, albeit from high levels, as the world economy stutters and the country's government struggles to push ahead long-pending reforms, such as allowing foreign direct investment in the supermarket and airline sectors.

In China, the official services PMI showed that water-borne transport, hotels and postal services all contracted, while Internet software, air transport and residential services remained in growth territory.

"The index indicates the stable economy expansion in the non-manufacturing sector has not been changed," said Cai Jin, a vice president at the China Federation of Logistics and Purchasing (CFLP), which conducts the official survey on behalf of China's National Bureau of Statistics.

Notably, the construction services sub-index rose by 2.3 points to 60.4 in the official PMI, indicating strong growth and reflecting a loosening of the tight restrictions on China's property developers that reined in economic growth in the first half of 2012.

Expansion

China's top leaders, President Hu Jintao and Premier Wen Jiabao, promised this week to step up policy "fine tuning" in the second half of the year to support the economy.

Beijing has cut interest rates twice and banks' reserve requirements three times since November. Investors expect to see more, though few expect a full-blown stimulus package similar to the one launched during the global financial crisis of 2008-09.

Reuters

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