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  • Aug 22, 2014
  • Updated: 8:05am
BusinessEconomy
Chinese economy

Growth in China service sector eases as business sentiment weakens, HSBC PMI shows

PUBLISHED : Thursday, 05 June, 2014, 10:16am
UPDATED : Friday, 06 June, 2014, 12:01am

Growth in the mainland's services sector retreated last month to a four-month low, a private survey showed, contrasting with other data that had raised hopes that the world's second-largest economy may have steadied.

The services purchasing managers' index compiled by HSBC/Markit slipped to 50.7 from April's 51.4 but remained above the 50-point level demarcating a monthly growth in activity from a contraction.

In a sign that some companies remained cautious about their prospects, business expectations fell to 58.1, a one-year low and the second-worst reading ever recorded since collection of the data began in November 2005.

The findings buck the trend seen in other mainland PMI data in recent days, which suggested the economy may be stabilising after a weak start to the year, and raise the question of whether Beijing needs to do more to put a floor beneath growth.

"Growth momentum remains slow and private sector sentiment is weak," HSBC economist Qu Hongbin said in reference to the "slight disappointment" in the latest PMI poll.

"We think policymakers should continue to ease monetary and fiscal policies in coming months to help support growth."

Three separate PMI polls released in the past week all showed the mainland's factory and services sectors enjoying their best performances in four or five months in May as foreign and domestic demand improved.

Taken together, the PMI releases signal that the country's economic outlook is uncertain.

Businesses appear to agree.

Firms surveyed in the PMI indicated they were not as confident as before. And the guardedness had led companies to delay hiring new workers, HSBC/Markit said, citing anecdotal evidence.

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singleline
According to the article “Arresting China’s slowdown: the search for sustainable growth” published by the FT,
‘… China’s leadership will introduce more mini-stimulus programmes, relax constraints on housing purchases and loosen credit policies to arrest the slowdown.
These actions will not promote more sustainable growth but will simply result in another round of asset price inflation.
The only alternative is to act more forcefully on those parts of the Third Plenum reform agenda which will boost productivity.’
(****blogs.ft.com/the-a-list/2014/06/03/arresting-chinas-slowdown/)
singleline
According to the author, there are two ways to promote more sustainable growth in China at present.
One is the country’s new urbanization programme.
But the rural workers should be allowed to move to the major cities instead of the smaller ones.
Another is allowing more private, including foreign, involvement in protected economic activities.
The impact on productivity is potentially the greatest in services, notably finance, education and health.
singleline
A similar argument is presented in the following article:
****english.caixin.com/2014-06-03/100685451.html
singleline
One way out is to imitate Japan.
'An economic plan (the successful Ikeda plan) to double the national income in ten years (between 1961 and 1970) was adopted by the Japanese Government in December 1960.
The purpose of the plan is to maintain the high rate of economic growth realized in the past decade, in order to raise further the living standards of the people and to attain full employment.'
(From 'Appraisal of Japan's Plan to Double Income'
****www.jstor.org/discover/10.2307/3866067?uid=3738176&uid=2129&uid=2&uid=70&uid=4&sid=21104261220143)
It only took 7 years for Japan to finish doing the job.
(You can also read ****www.nationsencyclopedia.com/Asia-and-Oceania/Japan-ECONOMIC-DEVELOPMENT.html)
singleline
I still remember the Hong Kong newspaper article written by a learned Chinese writer in the early 1980s :
A wealthy HangZhou merchant was preparing for a big and very expensive wedding banquet for his son, the bridegroom.
Every detail of the banquet was carefully attended to, only to discover at the end that they had forgotten one most important thing --- sending a wedding palanquin to transfer the bride back home !
It is hoped that the Chinese leaders will also not forget about the most important thing in their latest complicated and inter-connected reform efforts:
improving the living standard and well-being of the Chinese residents.
singleline
Which retail shop in Hong Kong is expected to be much more profitable ?
The one in Apliu Street, ShamShuiPo, or the one in Russell Street, Causeway Bay, now the most expensive street in the world ?
The answer is obvious.
China’s economic outlook remains uncertain because there is no sustainable clean fuel to fire up the engine of the whole economy.
Here the sustainable clean fuel is the Chinese resident's overall high average income (or wealth) level.
The engine of the whole economy can also be fired up by using expansionary monetary, fiscal or trade policies, but these fuel are either not sustainable, or not so clean (have other side effects).
A good doctor will tell you that every drug to cure a certain disease has some side effects which may adversely affect the other part of the human body.
Does China have a wealthy middle class to support the sustained development of a healthy service industry ?
Can the country's service industry grow healthily when relatively poor people are earning money from each other, as in Hong Kong's Apliu Street ?
singleline
Forget about the present heated debate about the relative merits of targeted and across-the-board RRR reduction.
What matters for China's sustainable economic and employment growth is to raise the income or wealth level of her citizens.
singleline
Needless to say (well, sometimes, this can't be taken for granted in China), the gradual rise in China's labour wage rate should be caused by a commensurate increase in their productivity, not by artificial government intervention, in the form of 'higher-than-normal' minimum wage rates and the like.
singleline
It may not be so easy to increase the productivity of China's manufacturing workers.
With ample supply of cheap labour (230 million at the end of 2008) from the villages in the nearby provinces, and very high cost of capital (these two are mirror images of each other),
will a factory owner in the Canton province upgrade the factory’s production technology and climb up the value chain ?
Of course not. It does not pay to do so.
The ample supply of cheap labour, reflected by the mass migration of rural farmers between the villages and the cities during the Chinese lunar new year holidays, is the main reason causing the country’s coastal factories to remain in the stage of low-technology assembly-line method of production in the past 30 years.
Another reason is the high cost of capital --- it is very difficult for the private enterprises to engage in research and development.
These being the case, a rational entrepreneur always chooses the method of production which is the simplest and most labour-intensive.
singleline
The rising wage rates seen along China’s coastal cities means more relocation of labour-intensive industries from China to India, Vietnam and other places in recent years.
To the surprise of the reporters, they found that the wage rates in those countries are not much different from that prevailing in China !
Actually, this observation should not be too surprising.
In the past 20-30 years, China’s massive and cheap labour force had suppressed the overall rise in wage rates in the world.
Today, the rise in China’s wage rates can also pull up those in the other countries.
As the world’s main supplier of labour, China is more like a price-determiner than a price-taker.
It can be said that, owing to the country’s comparative advantage in the labour-intensive industries, China’s present dominance still cannot be replaced by any other countries in the world, at least in the short term.
For one thing, the assembling of Apple’s iphones is massively done in China, not in India.
The law in India prevents the country from hiring too many workers in a single factory.
So there are many small factories there, but very few big ones.
Perhaps this may change in the future.
(From 'China 2013: What Matters Most')

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