HSBC China services PMI steady, economy subdued

BEIJING (Jan 5): China's services sector entered a seventh straight year
of expansion in December, a survey of purchasing managers showed on
Thursday, but a slowdown in the world's second-biggest economy saw
overall levels of activity mired at three-month lows.

The HSBC
China services purchasing managers index (PMI) stood at 52.5 in
December, unchanged from November, signalling a steady if sluggish
expansion in the sector that is increasingly a barometer for domestic
economic conditions.

"Unmoved on November's three-month low, the
service sector PMI pointed to subdued growth momentum," Qu Hongbin,
chief economist for China and co-head of Asian economic research at HSBC
said in a statement accompanying the index.

That said it was
the 74th straight month that the index had read above 50 -- the level
that demarcates expansion from contraction -- and a level it has been
above every month since the survey started in November 2005.

The
steady state of the HSBC index, compiled by UK-based data provider
Markit, will reinforce the views of some investors that China's economic
slowdown will be modest and short-lived.

A solid rebound in the
official services PMI earlier this week followed on from a gentle
bounce in manufacturing activity in both official and private sector
surveys.

But the sensitivity of investors to any uptick in
headline economic news is arguably a function of how skewed their
portfolios are towards anticipating further deterioration.

"The market is very vulnerable right now to good news," Michael Kurtz, chief Asia equity strategist at Nomura, said.

Kurtz says an anticipated softening of economic data has left regional
hedge fund managers with extended short positions and mutual fund
managers underweight growth-sensitive stocks and overweight cash,
raising the risk of a squeeze higher for equities if data comes in any
better than downbeat expectations.

"We think the markets have
already priced in a lot of soft growth in the first half'" Kurtz said.
"There is a risk of a perfect storm for upside surprises."

UNCERTAIN OUTLOOK

The global economic outlook may be dark -- courtesy of Europe's
festering debt crisis and still anaemic consumption in the United States
-- but conditions are arguably better than those in late 2008 when
global financial markets were in chaos and the HSBC Service PMI sank
into the low 50s.

The latest index reading of 52.5 is above
levels in the first quarter of 2011 when Chinese monetary tightening was
in full swing, dampening both domestic inflation and economic activity.

Sub-indexes of prices charged and outstanding business edged below 50,
although both gave readings consistent with the history of the survey --
respondents appear to have an entrenched view that they have limited
pricing power and insufficient work outstanding.

Business
expectations fell to the lowest in the services PMI's history -- though
that sub-index remains far and away the most robust element of the
overall survey -- and were a clear signal to HSBC of the need for policy
action to support economic growth in the months ahead.

"More
headwinds are down the road due to the still weak manufacturing sector,
slower jobs growth, the ongoing property correction and cooling external
demand. All these factors call for more aggressive easing measures," Qu
said.

Investor expectations are building that China is poised
to announce a further easing of monetary conditions after a 50 basis
point cut in late November to the ratio of cash banks are required to
keep as reserves.

That reduction, from a record high of 21.5
percent, is estimated to have injected about 350 billion yuan ($56
billion) of credit into the economy.

Analysts expect
fourth-quarter growth data from China to show a further slowdown in the
rate of economic expansion, with many forecasting annual growth to have
fallen below 9 percent in the last three months of the year. - Reuters