China services firms see slower growth, weaker outlook

By Jonathan Standing

BEIJING (Reuters) - Business confidence in China's services sector slipped in September and growth slowed, a private survey showed on Tuesday, another signal the world's No.2 economy is finding it difficult to regain solid momentum after a protracted slowdown.

The Markit/HSBC services PMI for September dipped to 52.4 from August's 52.8, although it was still well above the 50 line that separates expansion from contraction. A rise in new business offset a slowdown in new orders, the survey said.

The survey showed business expectations weakened sharply, with respondents citing muted demand, although conditions were still expected to improve in the next year. The expectations sub-index stood at 58.7 in September from August's 62.0.

"The degree of confidence eased from August's five-month high and was the second-weakest in the near eight-year series history," HSBC said in a statement.

The government has an economic growth target of 7.5 percent for 2013, which would be the weakest rate in more than 20 years, and has repeatedly said it would accept slower growth as it tries to restructure the economy to be driven by consumer demand, rather than investment, credit and exports.

As part of the reforms, businesses may find funding harder to come by as the government looks to tighten credit and curb state spending, adding to the likelihood of slower growth.

"By no means is the economy out of the woods because growth is being driven by the old engines, that is the local government and property," said Dong Tao, economist at Credit Suisse at Hong Kong.

"Both sectors have their own specific problems and in the long term neither are on a sustainable track. Over the long term China needs to find new growth engines, China must not continuously rely on local investment and the property market."

GDP grew at an annual rate of 7.6 percent in the first half of 2013, slower than 7.7 percent last year and 9.3 percent in 2011. GDP data for the third quarter is due on October 18.

GRAPHIC: China, EU, US services PMI http://link.reuters.com/dyh85s

IMPORTANT PILLAR

On Monday, President Xi Jinping said a "7 percent annual growth rate will suffice" to meet China's medium-term goal of doubling per capita income by 2020.

"The slowdown of the Chinese economy is an intended result of our own regulatory initiatives," Xi said at an Asia-Pacific Economic Cooperation (APEC) forum in Indonesia, adding China's fundamentals remained good.

The services industry, which has so far weathered the global slowdown much better than the factory sector, is an increasingly important pillar in the economy as it accounts for about 45 of gross domestic product and is the biggest employer in China.

Employment in services increased only marginally in September, the PMI found, with the sub-index at 50.6 from August's 50.5

China plans to open up the largely sheltered sector to foreign competition and to test financial reforms in a new free trade zone in Shanghai.

OFFICIAL CONTRAST

The Markit/HSBC PMI reading is in contrast to China's official services PMI, released last week, which showed the sector expanded at the fastest pace in six months in September as demand grew. The official PMI rose to 55.4 in September from August's 53.9.

The two surveys differ in that the official one is more weighted towards bigger and state-owned firms while the Markit/HSBC one looks more at smaller private firms, pointing to the possibility of a two-tier recovery.

Tuesday's survey also followed a pair of PMIs which showed slower-than-expected expansion in China's factory sector in September.

Weak domestic demand and overcapacity had been the main culprit, leading to only slight growth in output and new orders. Smaller manufacturing firms also struggled, one of the surveys found.

(Additional reporting by Natalie Thomas; Editing by John Mair)