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China Services Growth Weakens as JPMorgan Cuts: Economy

China’s Non-Manufacturing Growth Slowed in May
Non-manufacturing industries, including construction, account for about 40 percent of China's economy. Photographer: Nelson Ching/Bloomberg

China’s non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing, an official survey indicated.

The purchasing managers’ index fell to 55.2 in May from 56.1 in April, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. That’s the lowest reading since March 2011 when the federation started seasonally adjusting the data.

The report adds to evidence that the world’s second-biggest economy is weakening as Europe’s debt crisis crimps demand and government curbs on the property market feed through to more industries. JPMorgan Chase & Co. has cut its full-year economic growth forecast for China twice in a month and now estimates an expansion of 7.7 percent, down from 9.2 percent in 2011.

“The data reinforce the message that the slowdown has spread from the manufacturing sector to the services sector,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore. “The current slowdown is more complicated to read than the 2008 global financial crisis and is stressing the authorities’ vaunted fine-tuning skills.”

Asian stocks dropped after the services data and a U.S. payrolls report that showed fewer jobs added to the American economy than forecast. The MSCI Asia Pacific Index slid 2.2% as of 12:13 p.m. Tokyo time. Japan’s Topix fell below the lowest level seen during the 2008-2009 financial crisis and headed for its weakest close since December 1983.

‘Very Bad Condition’

“The overall external economy is in a very bad condition, and it is very unlikely to change in the short term,” Hong Kong Financial Secretary John Tsang told lawmakers today. “If Greece exits the euro-zone, it will bring a tremendous impact to the European as well as the global economy.”

China retains confidence in the euro even with the large uncertainties in the region, central bank governor Zhou Xiaochuan said in an interview with China Business News. The publication didn’t say when the interview was conducted.

“The uncertainties surrounding the exit of Greece from the euro area and the sovereign debt crisis in peripheral countries have intensified substantially,” JPMorgan analysts said in a note dated June 1. The risk is “a significant drag” on China’s economic recovery, the bank said.

An index of euro area investor confidence is due to be released today, along with unemployment figures for Spain, a nation at the center of the region's concerns after a jump in its borrowing costs.

The U.S. may announce today that orders to factories increased in April after a decline in March, according to a Bloomberg News survey of economists.

Chinese Data

Service industries now account for 43 percent of the Chinese economy, the federation said in yesterday’s statement. That compares with almost 90 percent in the U.S. The government aims to raise the share to 47 percent by 2015, according to a Xinhua news agency report on May 28.

The services PMI doesn’t have as much sway with investors as the manufacturing data, as “it’s a new series, so its tracking ability is still uncertain,” Condon said.

A Chinese manufacturing index had the weakest reading in five months in May, statistics bureau and logistics federation data last week showed, helping push Brent crude below $100 a barrel for the first time in almost eight months.

The 50.4 reading for May was near the 50 mark that divides expansion from contraction and compared with a 52.0 median estimate in a Bloomberg News survey of 27 economists. A separate gauge from HSBC Holdings Plc and Markit Economics released the same day showed a seventh straight contraction, the longest since the global financial crisis.

Weak Momentum

The manufacturing surveys present “clear signs of weak economic growth momentum,” China International Capital Corp. analysts led by Beijing-based Peng Wensheng said in a June 1 note. “The National Development and Reform Commission has recently expedited project approvals but whether this can effectively stabilize investment and GDP growth still depends on monetary and credit policies.”

The economists forecast two to three more cuts in banks’ reserve requirements this year and say a reduction in benchmark lending rates is likely.

Premier Wen Jiabao and the State Council, or Cabinet, warned last month that the economy faces increasing downward pressure. They pledged to put a greater focus on growth and “actively” raise domestic demand.

The government announced new subsidies to boost sales of energy-saving household appliances including refrigerators and washing machines after the expiry of a previous program last year. Gome Electrical Appliances Holding Ltd., China’s second-biggest electronics retailer, said May 25 its first-quarter net income slumped 88 percent from a year earlier as the end of the incentives led to a drop in consumer demand.

Growth Slowdown

The government is also stepping up approvals for infrastructure and corporate investment projects to counter the economic slowdown that Credit Suisse Group AG estimates will push growth down to 7 percent or “slightly below” this quarter compared with a year earlier. Expansion moderated to 8.1 percent in the first three months of the year, the fifth straight quarterly slowdown.

The National Development and Reform Commission said on May 25 it gave Baosteel Group Corp., the parent of China’s largest listed steelmaker, approval for an $11 billion plant more than seven years after the project was conceived.

Steel industry fundamentals are “likely to deteriorate in 2012,” weighing on the credit quality of Baosteel, Nippon Steel Corp. and Posco, Standard and Poor’s said in a research report today.

The non-manufacturing PMI is based on a survey of about 1,200 companies covering 27 industries including construction, transport and telecommunications. The federation and statistics bureau started publishing a seasonally adjusted index for the non-manufacturing PMI from the March survey, and revised readings back to March 2011.

A separate services industries gauge will be released by HSBC and Markit tomorrow.

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