China Dec HSBC Services PMI At Three-Month High, More Stimulus Still Seen

(Reuters) - China's services sector grew at its fastest pace in three months in December as new orders remained strong, a private survey showed, an encouraging sign of strength even as manufacturing activity slows and the property market softens.

The robustness in the services sector contrasted sharply with surveys last week which showed Chinese factories were struggling at the end of 2014, suggesting a further loss in economic momentum.

Those findings reinforced expectations that more stimulus measures are on the cards, either in the form of more liquidity injections by the central bank, interest rate cuts or reductions in the amount of reserves banks must hold to encourage them to lend.

"Given the traditional industrial sector is still under pressure, more policy loosening is necessary," said Zhou Hao, ANZ economist in Shanghai.

"Recent moves by the central bank showed they actually kept a relatively loosening policy stance to lift growth, even though they seem to not want to send a strong easing signal."

The HSBC/Markit Services Purchasing Managers' Index (PMI) picked up to 53.4 last month from November's 53.0, well above the 50-point level that separates growth from contraction in activity on a monthly basis.

A sub-index measuring new business cooled slightly to 53.9 in December from a 2-1/2 years high of 54.2 in November, but remained well in expansion territory.

The labor market was also buoyant, with the employment sub-index hitting an 18-month high as companies expanded. Chinese leaders suggested last year they could tolerate somewhat slower economic growth as long as labor markets remained healthy.

But services firms were not so optimistic on the outlook. A sub-index for business expectations for the year ahead dipped to the lowest level since August 2014, with many firms saying increasing competition was dampening their pricing power.

"The services sector continued to hold up well amidst the manufacturing downturn, providing some counter-weight to the downward pressures on the economy," said Qu Hongbin, chief China economist at HSBC.

"We continue to believe that there is insufficient demand in the overall economy and more (policy) easing measures are warranted in the coming months."

FLAGGING GROWTH

A similar official survey released last week showed similar strength, with the services PMI rising to 54.1 in December from November's 53.9. That survey focuses more on larger, state-owned firms.

Hurt by a sagging housing market as well as slowing domestic demand and investment, China's economy is expected to grow at its slowest pace in 24 years in 2014, with annual growth seen at 7.4 percent.

With weakness in property and fixed investment expected to persist for much of this year, and bad loans likely to rise, some economists have urged Beijing to set a 2015 growth target of 7 percent for 2015, compared with 7.5 percent for 2014.

After saying for months that China doesn't need any big economic stimulus, the central bank unexpectedly cut interest rates in November for the first time in more than two years to support growth.

It has also loosened some lending restrictions to persuade banks to make more loans and injected funds into the banking system in an attempt to bring down high funding costs.

Those moves may have bought the central bank some time to see if conditions improve, though many economists still expect more rate cuts as well as reductions in banks' required reserve ratios (RRR) this year.