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China Services Index Falls to Record Low

China Real Estate
A partially demolished residential building, left, stands next to a residential complex in the Zhujiang New Town district of Guangzhou, China. The International Monetary Fund’s China mission chief warned last week real estate is the biggest near-term risk to the economy. Photographer: Brent Lewin/Bloomberg

China’s service industries stagnated in July as a private index fell to a record low, suggesting the government’s stimulus measures are failing to gain traction outside of manufacturing.

The services Purchasing Managers’ Index declined to 50.0, the dividing line between expansion and contraction, from June’s 53.1, HSBC Holdings Plc and Markit Economics said today. A similar official gauge released Aug. 3 dropped to a six-month low of 54.2.

Asian stocks extended losses as the HSBC-Markit index’s lowest reading since it began in 2005 signaled that falling home prices and new construction are dragging on services, which account for almost half of gross domestic product. The International Monetary Fund’s China mission chief warned last week real estate is the biggest near-term risk to the economy.

“The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said in a statement. The report points to the need for “continued policy support to offset the drag from the property correction and consolidate the economic recovery,” Qu said.

The MSCI Asia Pacific Index of stocks dropped 0.4 percent at 1:48 p.m. in Tokyo, while the Shanghai Composite Index was down 0.3 percent at the 11:30 a.m. local-time break.

Today’s services report contrasts with the HSBC-Markit manufacturing PMI, which rose in July to an 18-month high of 51.7. The government’s manufacturing PMI also increased to 51.7, signaling the fastest expansion in more than two years.

Government Stimulus

China’s government stimulus so far this year includes expedited railway spending, tax cuts and affordable-housing construction, as well as moves to free up money for lending for agriculture and small businesses.

The HSBC-Markit services index is based on a survey of more than 400 companies in industries including hotels and restaurants, transportation and storage, financial intermediation, renting and business activities and post and telecommunications.

The report showed the weakest expansion of new business in more than five years, while unfinished work fell in July at the quickest rate in 20 months, according to HSBC and Markit. At the same time, companies expanded employment “moderately,” they said.

The government’s non-manufacturing index is based on responses from purchasing managers at 1,200 companies in 27 industry groups including catering, retailing, construction and transportation.

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