China may hold off tightening monetary policy after growth in services and manufacturing weakened, underscoring challenges for the nation’s leaders as they open the annual session of parliament tomorrow.

Expansion in industries including retailing, transport and banking, was the slowest in five months in February, an official survey of purchasing managers showed yesterday. Gauges released two days earlier pointed to manufacturing growth cooling.

Premier Wen Jiabao will outline economic policies at the start of the National People’s Congress in Beijing as the government grapples with sustaining a recovery from the slowest growth in 13 years without triggering a resurgence in consumer and asset-price inflation. While the government has pledged to boost incomes and consumption, last week’s decision to intensify a three-year crackdown on the property market may damp the nation’s rebound.

“China’s recovery is mostly based on fiscal and monetary stimuli unleashed in the fourth quarter of 2012 mainly through infrastructure investment and a housing market recovery,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The private sectors are still struggling with an overcapacity problem.”

Tougher property rules will slow down the “positive impact” that rising housing market activity has had on the economy in recent months, said Shen, who previously worked at the International Monetary Fund and European Central Bank. “However, the government can’t tolerate further price increases.”

A services industries gauge fell to 54.5 in February from 56.2 in January, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday.

The federation’s manufacturing PMI released March 1 dropped to 50.1, the weakest level in five months, while a separate gauge from HSBC Holdings Plc and Markit Economics fell to a four-month low of 50.4. Readings above 50 indicate expansion while those below signal a contraction. HSBC will release its services index tomorrow.

The PBOC is “fully confident of controlling inflation this year,” Deputy Governor Yi Gang said in Beijing yesterday. While the nation faces “some” pressure, he estimated the consumer- price index will rise about 3 percent in 2013, compared with 2.6 percent last year.

Premier Wen may announce an inflation target in his speech tomorrow. Policy makers aim to keep consumer-price gains at about 3.5 percent, Bloomberg News reported in December, citing two bank executives and a regulatory official briefed on the matter. Wen set a goal of 4 percent for 2012.

Moderating inflation this month will relieve pressure for tightening, Song Guoqing, an academic adviser who sits on the central bank’s monetary policy committee, said March 2.

Song, one of three academics who sit on the PBOC’s monetary policy committee, said inflation will be “relatively low” this month due to slowing food-price gains. Compared with January and February, the pressure for tightening monetary policy and macro- economic controls “has in my view been relieved,” he said at a forum in Beijing.

Song, a Peking University professor who studied economics at the University of Chicago, was appointed a central bank adviser in March 2012. The People’s Bank of China has limited powers, with the State Council having the final say on interest- rate moves. The nation has kept benchmark borrowing costs on hold since July last year. The key one-year lending rate is 6 percent. 

Consumer inflation eased to 2 percent in January from a year earlier after a 2.5 percent increase the previous month, government data show. UBS AG estimated February’s rate was 3.3 percent while Mizuho forecast 3 percent, as a Lunar New Year holiday pushed up food prices, according to reports last week. The statistics bureau will release the data on March 9.

The PBOC drained cash from the financial system in each of the two weeks after the holiday that ended on Feb. 15, boosting speculation that it was tightening amid concerns inflation will accelerate and real-estate price gains are excessive.

The central bank withdrew a net 5 billion yuan ($803 million) last week and 910 billion yuan the previous week, the most since Bloomberg started compiling the data in 2008. It sold repurchase contracts for the first time since June on Feb. 19, taking out funds from banks after they lent the most in two years in January.

Governor Zhou Xiaochuan said on March 1 the funds were drained to remove cash injected before the Lunar New Year festival, according to a report on the Securities Times website that day.

China’s economy expanded 7.9 percent in the final three months of 2012 from a year earlier, the first pickup in two years. The pace may accelerate to 8.2 percent in the three months through March before slowing to 8 percent in the fourth quarter, according to the median estimates in Bloomberg News surveys in February.

The property curbs detailed March 1 come as China prepares to complete a once-a-decade leadership handover. Communist Party chief Xi Jinping is set to become president and Li Keqiang will replace Wen as premier at the end of the NPC. Among the challenges they will inherit are environmental degradation, widening income inequality and surging home prices that have put ownership beyond the reach of millions. (Bloomberg)