China's services sector grows at the slowest pace in six months, more stimulus expected

Local residents picking vegetables at a market in Beijing on Dec 5, 2014. -- PHOTO: AFP
Local residents picking vegetables at a market in Beijing on Dec 5, 2014. -- PHOTO: AFP

BEIJING (Reuters) - China's services sector grew at the slowest pace in six months in January as growth in new business weakened, a private survey showed, raising expectations that policymakers may unveil more stimulus steps to avert a sharper slowdown in the world's second-largest economy.

The HSBC/Markit Services Purchasing Managers' Index(PMI) slowed to 51.8 last month - the weakest since July 2014 - from December's 53.4, but remained above the 50-point level that separates growth from contraction in activity on a monthly basis.

The weakening performance of the services sector, which has helped cushion the broader impact of a cooling manufacturing sector, could fan market concerns about China's economic slowdown in 2015.

"The Chinese services sector continued to expand in January, albeit at a slower pace while both input and output price inflation eased," said Qu Hongbin, chief economist at HSBC. "Given continued contraction of the manufacturing sector, we believe more easing measures are warranted to support growth in the coming months."

A sub-index measuring new business eased to 52.5 in January, also a six-month low, but the sub-index measuring employment inched up as firms hired more workers for the 17th month in a row.

The continued creation of more jobs could temper Beijing's policy response as government officials have signalled they would tolerate somewhat slower growth as long as the labour market remained resilient.

Official surveys showed on Sunday that growth in the services sector cooled to a one-year low in January while the factory sector unexpectedly shrank for the first time in nearly 2-1/2 years.

China's economic growth slowed to 7.4 per cent in 2014 - the weakest in 24 years - from 7.7 per cent in 2013. But the services sector has outperformed the manufacturing sector, creating more jobs even as the broader economy loses steam.

Services accounted for 48.2 per cent of the economy in 2014, up from 46.9 per cent in 2013, while the secondary sector, which includes manufacturing and construction, accounted for 42.6 per cent of the economy last year, down from 43.7 percent.

The economy faces formidable headwinds into 2015 as a property downturn persists while companies will continue to struggle to pay off debt and export demand may remain erratic.

Analysts polled by Reuters in January expected economic growth to sag further this year to 7 per cent, even with additional stimulus measures.

China's central bank, which cut interest rates in November after unveiling a stream of more modest stimulus measures, is widely expected to loosen policy by injecting more money into the financial system and via more aggressive measures such as cutting interest rates further or lowering reserve requirement ratios for all banks.