Service sector drives up growth

The service sector is tipped to replace the manufacturing industry and become the strongest driver of the Chinese economy.

Economists said China seems to be moving toward a more environmentally sustainable and less resource-intensive growth pattern, as the faster improvement of the service sector is in stark contrast with a sluggish manufacturing industry.

The British financial group HSBC reported on Monday that July's service purchasing managers index was 51.3, signaling a modest increase in business activity in the service sector.

New order growth in the sector rose to a five-month high as market demand increased. Employment in the sector also improved slightly, HSBC said.

The HSBC index reinforces the findings of the official non-manufacturing PMI data, released on Saturday — a reading of 54.1 in July, up from 53.9 in June.

"The current indicators suggest that non-manufacturing growth is stable and sound, providing a solid foundation to the overall economy," said Cai Jin, vice-chairman of China Federation of Logistics and Purchasing, which compiles the official non-manufacturing PMI data.

"It is a good start to the second half. We are confident of stabilizing growth and achieving the year's target, although there will be more challenges," he said.

Qu Hongbin, chief economist in China and co-head of Asian economic research at HSBC, showed more concerns about sustainable service growth in the near future.

"Although the service sector has maintained stable growth so far, the profit margin continues to be squeezed, given the divergence between input prices and prices charged."

"Without a sustained improvement of demand, service growth is likely to remain lackluster, putting downside pressures on employment growth," Qu said.

In contrast to the service sector, the HSBC manufacturing PMI stood at 47.7 in July, down from 48.2 in June, reaching an 11-month low and indicating an increasing rate of contraction of industrial businesses that face excessive production capacity.

The official manufacturing PMI data increased to 50.3 in July from 50.1 in June.

Chang Jian, a senior economist with Barclays Capital, said that despite the disappointing industrial performance, the service sector is becoming China's new growth engine and it has been "the bright spot" in the first half.