China’s services sector expands at fastest pace in 14 months

China’s services sector showed a significant rebound in July, expanding at its fastest pace in 14 months, driven by a combination of domestic and foreign demand, according to the latest private-sector data. The S&P Global China General Services PMI rose to 52.6 in July, up from 50.6 in June, marking the highest reading since May of the previous year. The PMI reading above 50 indicates expansion, while anything below suggests contraction. The strong performance in July contrasts with China's official services PMI, which edged down to 50.0 from 50.1 in June, signalling stagnation. However, the S&P Global survey, which is regarded as a more accurate gauge of trends for smaller, export-focused companies, particularly along the East Coast, paints a more optimistic picture.

Domestic stimulus and strong export orders drive growth

The rise in services activity was notably supported by a surge in new business, especially in export orders. This marks the first increase in the export orders sub-index in three months, signalling that global trade conditions may be stabilising despite ongoing trade tensions. The demand for services, including tourism and food delivery, has been robust, boosted by consumer-orientated stimulus measures from Beijing. In addition to the surge in new business, employment in the services sector also rose at its fastest pace since July 2024, driven by an uptick in workload and improved business confidence. Service providers had reduced staffing levels earlier in the year but now appear to be increasing hiring in response to stronger demand.

Inflationary pressures and rising costs for service providers

While the services sector showed resilience, the rising costs for raw materials, fuel, and labour were a concern for many businesses. As a result, service providers were forced to raise their selling prices for the first time in six months. This, in turn, resulted in slower accumulation of backlogged work, a sign of improving efficiency as demand outpaced supply. Despite positive growth in services, concerns about China’s broader economic outlook persist. The country’s manufacturing sector has struggled, with weak demand weighing heavily on factory output.

As a result, overall business confidence remains fragile, with a cautious outlook for the second half of the year due to potential slowdowns in exports and consumer sentiment. China’s economic recovery in the services sector has remained one of the bright spots, with strong consumer demand helping maintain positive momentum. However, the outlook for manufacturing and broader business activity will depend heavily on both domestic policy responses and external trade conditions.

(With inputs from agencies)