China’s services PMI plunges to 6-year low of 50.6 in August

Slowing new business flows are driving HSBC China Services PMI reading to the lowest level since the series began in Nov 2005. This reflects the effect of property and credit tightening measures. That said, property market is unlikely to collapse not least because of Chinese households' low leverage ratio and credit tightening is approaching to an end. This, plus the still resilient consumer spending, suggests China's services sector is likely to see moderation, not meltdown, in the coming months.

The headline HSBC China Services PMI eased to 50.6 in August or 2.9 points lower than the previous reading. This is the lowest reading since this series begun in November 2005 and is a touch lower than the previous trough of 51.2 during the global financial crisis time.

Such a notable slowdown is mainly driven by cooling new business flows, with the new business subindex fell by 1point from the previous month to 51.2, the second lowest reading in this reading's short history (historical low at 49.6 in November 2008) signalling only modest expansion. Respondents pointed out that their business was affected by property cooling measures apart from the softening domestic demand. The slowing new business inflows also lead to a faster pace of reduction in outstanding business and a slower pace of new jobs creation. Employment subindex eased to 50.9 in August, a post-crisis low but still in the expansion zone.

The easing trend of inflation largely holds. Despite the marginal pick-up, prices charged subindex (50.4 in August vs. 50.2 in July) remains subdued , well below long term average of 51 and 2Q's 51.7. Input prices continue to cool down to a six-month low at 55.3 in August, vs. 55.6 in July. But with labour costs running high, input prices subindex is still above the series' long term average of 54.6.

Overall services sectors are set to slow as both credit and property tightening measures are filtering through. This is nothing but a slowdown, we believe, for the following reasons:
First, although August reading fell to the slowest pace in this series' six year history, this still stay firmly in the expansion territory. Our data analysis suggests the current level is still consistent with around 8-9% growth for services sectors.

Second, credit tightening is likely approaching to the end. We expect monetary policy to shifting into neutral stance in the coming quarter when inflation slows meaningfully. This will be supporting overall growth.

Third, property market is unlikely to collapse although the tightening measures will sustain and inevitably cause some correction. The recent extension of property purchasing bans into second and third tier cities is likely to weigh on property market performance. But to be sure, from the policy makers' point of view, collapse in property market is the last thing they want to see. Meanwhile, we also see this unlikely not lease because of the low leverage ratio of Chinese households - only around 6% of Chinese households have mortgage loan.

Last but not least, consumer consumption is likely to remain resilient thanks to the sustained improvement in labour market and fast income growth. This will provide support to consumer-related services sectors.

Bottom line: China's services sector is likely to see moderation, not meltdown, in the coming months.