China's services sector growth cooled in July, still looks resilient

The Caixin/Markit services purchasing managers' index (PMI) fell to 51.7 in July on a seasonally adjusted basis, from an 11-month peak of 52.7 in June. Caixin composite PMI picked up strongly to 51.9 in July, the highest since September 2014, compared with 50.3 in June. The acceleration in the composite PMI is largely driven by the manufacturing PMI that increased by 2pt in June.

Despite the fall in July, the services sector looks resilient as the July reading is still above the 50 mark which separates expansion from contraction. The deceleration can be largely attributed to slowing new order growth and falling services employment. Services companies were downsizing to cut costs, but the overall employment decline was modest.

"Implementation of supportive measures including proactive fiscal policies must continue to protect the recovery, and regulations in the services sector should be further relaxed,” Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said in a statement.

The sentiment towards China’s economy appears to be improving, which is in line with the capital inflows in EM space. Economic growth in China stabilized at 6.7 percent annually in the second quarter, defying expectations for a decline to 6.6 percent. As a result, the International Monetary Fund (IMF) raised its outlook on China’s GDP growth to 6.6 percent this year, up from a prior estimate of 6.5 percent. Economic growth is forecast to slow to 6.2 percent in 2017.

In the meantime, the PBoC lowered USD-CNY fixing rates significantly by 256pips on Wednesday to 6.6195, hinting that a strengthening bias in CNY continues.