China services activity rebounds but property remains a worry

Services PMI jumps to 17-month high of 54.1 in August from 9-year low of 50 in July

Activity in China's services sector rebounded in August after a drop in July, two surveys showed on Wednesday, offseting factory-sector weakness and letting the government stick with its "targeted" policy stance to keep growth on track.

The government is determined to achieve its 7.5% economic growth target for 2014 to keep employment stable and rein in financial risks while pushing long-term reforms to put the world's second-largest economy on a more sustainable footing.

The services purchasing managers' index (PMI) compiled by HSBC/Markit jumped to 54.1 in August - the strongest in 17 months - from a nine-year low of 50.0 in July.

A reading above 50 in PMI surveys indicates an expansion in activity while one below that threshold points to a contraction.

Also, the official non-manufacturing purchasing managers' index (PMI), published by the National Bureau of Statistics, rose to 54.4 from July's six-month low.

Chinese stocks reacted positively to the PMI readings, with the Shanghai Composite Index up 0.9% at 0255 GMT and the Hang Seng Index rising 1%.

MIXED PICTURE

Both PMIs painted a mixed picture: demand picked up but a cooling property sector remained a drag, while employment - closely watched by policymakers to ensure social stability - was lacklustre.

The employment sub-index of the official PMI indicated a slight contraction in August while the sub-index of HSBC slipped from July.

"The economic expansion is quite uneven, as exports accelerate, investment slows, and the real estate correction intensifies, but on balance, headline real GDP growth is probably a bit faster to the third quarters," said Bill Adams, senior international economist for PNC Financial Services Group of the US.

"Growth is strong enough to prevent a rise in unemployment and attending social unrest," he said. "But until the government announces a credible workout strategy for China's rising mound of non-performing loans, it seems early to predict that the third quarter's stronger growth can be sustained."

Activity in China's vast factory sector cooled in August as foreign and domestic demand slowed, two surveys showed on Monday, spurring new calls for more policy easing to prevent the economy from stumbling once more.

DOWNSIDE RISKS

Recent data showed the economy is losing steam as a slowdown in the property sector appears to be deepening, putting pressures on the government to roll out fresh policy stimulus measures to support growth.

"The economy still faces downside risks to growth in the second half of the year from the property sector slowdown," Qu Hongbin, chief China economist at HSBC, said on Wednesday. "We think policymakers should use further easing measures to help support the recovery."

Premier Li Keqiang said last week that the government will maintain its "targeted" policy stance to keep economic growth on track, focusing on investment projects in bottleneck areas, including public hospitals, nursing homes and clean energy projects.

China's annual economic growth picked up slightly to 7.5% in the second quarter - in line with the official target for the year - from an 18-month low of 7.4% in the first quarter - helped by a flurry of policy stimulus measures.

WEATHERING THE STORM

Such measures included accelerated construction of railway and public housing projects, cuts in reserve requirements for some banks and loosening of property controls by some local governments to support the cooling housing market.

Hopes that the mild rebound would gain traction were dashed last month when growth in retail sales and fixed asset investment slowed, while money injected into the economy unexpectedly tumbled to a near six-year low.

The services sector, which covers everything from e-commerce firms, banks and retailers to fitness centres, has weathered the global slowdown much better than the factory sector.

The services sector made up 46.1% of gross domestic product in 2013, surpassing the secondary sector - manufacturing and construction - for the first time.

Services overtook manufacturing as China's biggest employer in 2011.