In May, China’s services sector showed slight growth, with new orders increasing at a faster rate than in April. However, new export orders faced a decline, largely due to the uncertainties surrounding U.S. tariffs, according to a private sector survey released on Thursday.
The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 51.1 in May, up from 50.7, indicating expansion as it remains above the neutral mark of 50. This aligns closely with China’s official services PMI, which increased from 50.1 to 50.2 in the same period.
The Caixin PMI offers insights into smaller, export-oriented firms primarily located along the east coast, while the official PMI focuses on larger and medium-sized enterprises, including state-owned institutions. The Chinese economy outperformed expectations in the first quarter, with the government maintaining an annual growth target of around 5%.
Nevertheless, analysts caution that the implications of U.S. tariffs could substantially hinder economic momentum. In a related development, Beijing and Washington agreed to a 90-day suspension aimed at reducing import tariffs, thus fostering hopes of de-escalation.
However, investors remain wary of potential delays in negotiations against the backdrop of ongoing global economic instability. Zhe Wang, a senior economist at Caixin Insight Group, noted that both manufacturing and services sectors experienced sluggish external demand.
While average costs for businesses slightly rose, selling prices weakened, thereby intensifying profit pressures. Despite the services sector’s growth, it could not compensate for the contraction in manufacturing production, as evidenced by the Caixin China General Composite PMI falling to 49.6 from 51.1, marking the first contraction since December 2022.
The central bank responded to the trade war by easing monetary policy and lowering deposit rate ceilings to mitigate margin pressures on banks. While both supply and demand exhibited slight expansion as businesses aimed to attract new clients, foreign demand was hampered by tariff uncertainties.
Employment indices remained just above the neutral point, with some firms cutting jobs to manage costs while others expanded their workforce to meet rising demand. Service businesses faced the highest input cost inflation since October 2024, driven by increased purchase prices and wages, while average output charges declined for the fourth consecutive month in May.
Overall, sentiment for the next year stayed positive, with hopes that the adverse effects of U.S. tariffs may lessen over time. However, Wang highlighted that ongoing unfavorable factors persisted, exacerbating domestic economic challenges.
He emphasized the need for further assessment of earlier consumption-initiating measures and suggested that boosting domestic demand should focus on improving household incomes.