China growth is slowing where it hurts the world most - Fed paper

SAN FRANCISCO (Reuters) - Surging growth in China's services sector doesn't generate nearly enough of an appetite for foreign goods to offset the decline from a slowing industrial sector, according to research published on Monday by the San Francisco Federal Reserve Bank.

China's leaders earlier this month said they plan to keep growth in the world's second-largest economy from falling below 6.5 percent, with most of the growth coming from the services sector. Meanwhile, industrial growth has slowed, driving down imports.

"(T)he strength in the service sector is unlikely to provide much support for countries that export commodities to China," wrote Mark Spiegel, the San Francisco Fed economist who authored the report.

That's bad news particularly for commodity-exporting countries like Australia and Brazil, but also indirectly may affect countries like the United States and Japan, the research suggests.

The Fed is watching China and the global economy closely, and in September delayed an interest rate hike in part because of concern over the slowdown abroad.

Over the long term, Spiegel wrote, China's shift to a services-dominated economy may benefit the rest of the world, because it will likely reduce its dependence on exports for growth.

But in the short term, he said, "a dollar of increased service sector activity is unlikely to fully compensate for a dollar of lost industrial sector output."

(Reporting by Ann Saphir; Editing by Meredith Mazzilli)