• Sat
  • Dec 20, 2014
  • Updated: 4:37pm

China’s July official services PMI dips to six-month low

PMI figures dip to six-month low as new orders slow last month

PUBLISHED : Sunday, 03 August, 2014, 2:23pm
UPDATED : Monday, 04 August, 2014, 2:07am

Growth in the mainland's services sector slipped to a six-month low in July as new orders rose at their weakest rate in at least a year, data showed, taking some of the shine off an industry that has been a bright spot in the economy this year.

The official purchasing managers' index (PMI) for the non-manufacturing sector slowed to 54.2 in July from June's 55, the National Bureau of Statistics said yesterday. That is the weakest reading since January.

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

The slight retreat in the services sector came at a time when mainland factories have started to recover, having earlier this year been one of the drags on growth in the world's second largest economy due to faltering demand at home and abroad.

In contrast, services firms have held up through each slowdown since PMI records began in January 2007, with the index staying above 50 in every month.

A mixed performance from other measures in yesterday's PMI suggested that the services sector enjoyed an encouraging, albeit slightly muddy, outlook.

Growth in new orders fell to their slackest rate in at least a year in July. Yet at the same time, companies' business expectations jumped to a level not seen in at least a year. Inflation within the sector, be it production or final sales prices, also quickened to a rate unseen in at least 12 months.

Cai Jin, vice-president of the China Federation of Logistics & Purchasing, which publishes the services PMI in conjunction with the mainland government, advised investors to not read too much into the divergence.

"The volatility in the various sub-indices for the July services PMI was not great," Cai said. "The market in general is still stable."

In contrast, he said weakness in the property sector persisted last month due to seasonal factors and muted demand.

"The market remains subdued. Prices are still in a downtrend, and declines have increased."

The mainland's once-heated housing market has slowed this year as sales and prices retreated in their biggest pull-back in two years, driven in part by a cooling economy, and after the government tried for almost five years to calm the market.

But the extent and breadth of the downturn have surprised analysts, with many worrying that it is the biggest threat to the health of the economy this year.

To limit the drag from a cooling housing sector on the overall economy, nearly half of the regional governments have started relaxing curbs on home purchases this year, reversing controls that were instituted from as early as 2009.

The services PMI followed two manufacturing PMIs released on Friday that showed the mainland factory sector posting its strongest growth in at least 11/2 years last month, suggesting that the economy is gathering steam after a spate of stimulus measures.

Economic growth picked up slightly in the second quarter, accelerating to 7.5 per cent from an 18-month low of 7.4 per cent between January and March.


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I think the same can also be done in Hong Kong.
Rather than reducing the future (rate of increase in) expenditures, or raising the future tax revenues, the Hong Kong government can cheaply borrow the money she needs in the bond market, using her present AAA bond rating.
At such low interest rates, the credit market has been screaming and begging us to borrow.
With the raised funds, the government can more easily finance the construction of the third runway in Chek Lap Kok, further develop the Lantau Island, build more new towns, subsidize the private elderly homes, and so on.
The structural budget deficit problem will then become much less serious than before.
This also helps to develop a deeper and bigger bond market in the city, a financial centre where the overall bond market is still not big and deep enough.
When the bonds mature, the government just needs to roll them over, even though the interest rates may become higher in the coming years.
This way we will not burden our future generation --- but without the 3rd runway they'll definitely be burdened.
Many of the most advanced countries in the world are now highly indebted, but the Day of Reckoning still hasn't come yet.
China's local governments and enterprises can be invited to issue bonds in Hong Kong as well, in small denominations so that most of the city's residents can invest in them.
With more interest incomes we will then rely less on our government as we get older and retire in the future.
A precondition for the development of the manufacturing and service industries in a country's big cities is urbanization.
So, the development of the manufacturing and service industries is the same as the development of urbanization.
It is a common economic law to use urbanization to develop the manufacturing and service industries in the big cities and gradually reduce the number of farmers in the villages, thereby greatly improving over time the average standard of living and average income of all the people involved.
Indeed this can be regarded as one of the greatest achievements of humankind.
But if the country's urbanization strategy restricts the amount of farmers settling permanently in the big cities, the invisible hand of the free factor market is artificially impeded and as a result the country's factors of production (labour, capital and land ) cannot be economically allocated to their most-valued uses.
All the benefits of economies of scale in the big cities are mostly lost.
With so many people remaining in the villages, no farm mechanization can be developed.
If so, the people cannot become as rich and the average living standard cannot become as high as they could have been if there is no intervention of the government's visible hand.
While there may be a Chinese way of economic modernization, there is certainly no Chinese way of urbanization, because the latter violates the simple economic law.
(Adapted from the Chinese book "Our People Have No Land")
Consider China's car industry.
The local-brand cars made domestically by the Chinese people still cannot compete successfully either with those cars imported from the foreign countries, or those foreign-brand cars domestically produced in China.
The vehicles bought and used by the government departments are mainly Germany's Audis, with very few domestically-produced ones.
The persistent problems of low-price competition and lack of innovative power are still there.
It shows that China's policy of using the domestic market to exchange for foreign technologies has been a mistake.
(From the Chinese book "50 Facts a Chinese Economist dares not tell You")
According to Lang Xianping, a Hong Kong-based economist, there have been too many collusions between the public and private sectors in China (官商勾结), forming various monopolies and so hurting the coming healthy growth of the service sector in the country.
Examples are the taxi industry and the massive wholesale food markets.
In the former service industry, because of the highly restricted amount of taxi licenses and the various high fees the taxi drivers have to pay to the oligopolistic taxi-renting companies, the Chinese commuters now have a hard time getting the taxi services, and have to pay high prices for this transportation services.
In the latter service industry, the supply of vegetables in the cities is also monopolized, raising the operating costs of the enterprises and hence increasing the prices of vegetables in the last kilometre of the supply chain.
(Chinese readers: ****blog.caijing.com.cn/expert_article-151249-72487.shtml)

The Computer and IT industries aside, the service industry can only contribute minor productivity growth to a country compared to the manufacturing industry.
In the US, most innovations and productivity growth are related to the manufacturing sector, not the service sector.
A half-hour haircut a century ago still takes half an hour nowadays, perhaps even longer for the demanding OLs.
China's coming growth rate will naturally drop as the development of her service industry gradually outpaces that of her manufacturing industry.
Without a good farming industry, a country cannot be secure.
Without a good manufacturing industry, a country cannot be strong.
While the service industry in an economy is also important, it cannot fully replace the importance of her manufacturing industry.
Well, with the possible exception of Hong Kong.
But it can be argued that, under regional division of labour, even we people in Hong Kong have also been providing various kinds of services (banking, insurance, transportation, fund-raising services, etc.) to the manufacturing sector of China.
The recent American 'remanufacturing' efforts proves this point also.
We live in the real world, not the virtual one.
The real economy is dominant, while the virtual economy (finance, internet, property sector) is subsidiary.
A booming city causes rising house prices, and hence increasing land prices, not the other way around.
Demand for land, one of the factors of production, is only a derived demand.
Its demand is derived from the demand existing in the real sector of the economy.
The Chinese economy should not be kidnapped by the property sector or the local governments' land finance.
We should always know who is boss.
It's also said that China's universities, engaging in 'elite education', may not be able to provide the right kinds of graduates for the country's industries.
The Chinese officials in charge of education may not know the true needs of the country's private employers.
More vocational and evening schools should be set up in the future, perhaps partly subsidized by the local governments, especially if we consider the coming needs of the farmer workers and their children in the latest hukou reforms.
A Germany-like apprenticeship scheme may also be considered --- the qualification of the apprentice graduates, with the certificates, will be recognized everywhere in the country.
The industries can also train their own workers, but the country's labour-contract stipulations may have to be revised.
Long-term contracts should also be more widely used, even though they give a slavery impression to us, to prevent the worker graduates from jumping ship immediately upon graduation.
China can only earn a very small proportion of the total value-added in the complete supply chain of an industry, if she keeps on acting as a low-cost assembly kingdom in the world.
Doing so only mainly benefits the foreign enterprises, which also gain from the revaluation of the yuan, while leaving the problems of labour disputes, retirement funding, various types of pollution, etc, to China.
The foreign consumers are also greatly subsidized through the country's massive exports tax rebates over the years.
Another reason the country has accumulated such a large amount of foreign reserves is that the advanced countries refuse to sell their high-tech knowledge to China, for obvious reasons.
Rather than depending on the foreigners, China should rely on her own people.
But the genius of the Chinese people can be fully captured only when the right kind of business environment has been set up and sustained in the country.
Intellectual property rights must be well protected to encourage the companies to invent and innovate, only then can they fully reap the fruits of their long and hard efforts.
A free, fair and competitive business environment should be set up --- no competition, no progress.
The cost of capital must be lowered to a more resonable level.
Active stock and bond markets must be developed to help the private SMEs and SMiEs to raise funds for further development.
Banks, by their nature, are risk-averse and so cannot do the above job well.
Which means, using targeted monetary policies or not, the PBOC has no way to give a genuine helping hand to the country's innovative companies.
These companies can only be financed effectively by the country's capital market.
Through the issuance of bonds and shares, the high risks are shared by all the participating investors.
The risks cannot be reduced, they are still there, only now shared among many many people.
So, the potential individual losses are much reduced, more money can be raised by the innovative companies as a result, and the chances of success are therefore much increased.
The insurance people must know what I am talking about.
Indeed, it's exactly the Wall Street and the well-developed capital market that has enabled America to overtake economically the other big countries in the world (Britain, France, China) only a century after the country's independence.
Britain, after the South Sea Bubble, was scared by the capital market.
She therefore relied more on her banking industries rather than the risky capital market.
Instead, America, a young country, kept on relying on and developing her capital market, which had financed many of the country's important investment projects, like canals and railways.
Pax Britannica was ultimately replaced by Pax Americana.
China, as a late comer, should learn from this lesson --- she is populous and large enough to be able to gradually develop her own capital market, rather than relying only on the banks.
Jay Cooke (1821 - 1905), a young banker, helped the North beat the South in America's Civil War, by issuing bonds to the American public in the North in small denominations of US$50.
Five percent of the people in the North bought his newly-issued bonds.
Indeed his rate of selling the bonds was even quicker than the speed of money spending by the Federal Government.
(From the Chinese book "Looking at the Rise and Fall of Big Nations through the hole of a coin")
Perhaps the same can be done in China right now.
China's present problem of rising leverage is both her strength and weakness.
The weakness is obvious.
The strength is the chance to develop a deep and sophisticated bond market to help finance the needs of the central and local governments, and the public and private enterprises, using the country's still-massive domestic savings.
This is much better than using the savings to finance the wasteful investments of the local governments and the SOEs through the intermediaries of the banks.
Smaller bond denominations can be devised so as to give most of the Chinese residents one more channel to invest their savings safely in the country.
They will then speculate less in the property market.
The precarious shadow banking sector, internet finance, and regional loan-shark businesses will all gradually subside.
The resulting market yield curve can better allocate the scarce funds in the market.
It also helps the yuan to become a foreign-reserve currency.




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