By Daniel Hunter

HSBC China Composite PMI data (which covers both manufacturing and services) signalled a contraction of output for the second successive month in July. Although the HSBC Composite Output Index signalled only a marginal rate of reduction, posting at 49.5 in July, down from 49.8 in June, it was the fastest recorded since November 2011.

Production levels fell at manufacturers for the second consecutive month in July. Furthermore, the rate of contraction accelerated from the previous month, but remained modest. Meanwhile, service providers signalled a modest expansion of business activity, as signalled by the HSBC China Services Business Activity Index, posting 51.3 in July, unchanged from the previous month. However, growth in the service sector remains historically weak.

New business fell at the composite level for the third month in a row during July. Sector data signalled similarly divergent trends to output, with manufacturers noting a further reduction in total new orders, while service providers noted a modest expansion in order book volumes. Furthermore, the rate of new order growth in the service sector was the fastest since March.

At the composite level, staffing levels declined for the fourth month in a row in July. Although the rate of job shedding was only slight, it was the strongest reduction since February 2009. The overall decline was driven by manufacturers, which signalled a marked rate of job cuts, while employment in the service sector increased slightly.

Volumes of outstanding business decreased across both the manufacturing and service sectors during July. Manufacturers indicated a modest rate of depletion, while service providers recorded only a marginal reduction. Consequently, the level of work-in-hand at the composite level fell slightly for the sixth successive month.

Input costs fell for the fourth month in a row at the composite level during July. That said, the rate of decrease was only marginal and the weakest in the current sequence. Divergent trends were signalled by sector data, however, as manufacturers noted a marked fall in operating costs, while service providers reported a modest increase.

Output charges were cut in both the manufacturing and service sectors in July. Manufacturers signalled a marked rate of discounting, despite easing to a four-month low, while service providers reduced their tariffs marginally. At the composite level, output charges fell modestly and for the fifth month in a row.

Optimism regarding future output growth remained relatively subdued in China’s service sector in July. Although the degree of optimism was higher than the survey-low in June, a number of firms were concerned that fragile economic conditions may dampen or reduce future activity.

“China’s service sector has stabilised at a relatively low level of growth. But the profit margin squeezed given the divergence between input prices and prices charged indices. Without a sustained improvement of demand, services growth is likely to remain lackluster, putting downside pressures to employment growth," Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said.

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