China’s services sector holds firm in May despite manufacturing drag amid tariff pressure
&imwidth=600&imheight=450&format=webp&quality=medium "China’s services sector holds firm in May despite manufacturing drag amid tariff pressure")
Chinese national flag flies as people walk on a pedestrian bridge in Shanghai, China April 15, 2025. Photograph: (Reuters)
New orders and hiring improve, but export weakness weighs on broader economy.
China’s services sector expanded modestly in May, demonstrating resilience amid growing external trade pressures that has weighed heavily on the country’s manufacturing activity.
The Caixin China General Services Business Activity Index rose to 51.1 in May from 50.7 in April, according to data released on June 5. This marks the 29th consecutive month of expansion in services activity, as companies reported improved domestic demand and a slight recovery in employment.
While the uptick was modest, it stood in stark contrast to the manufacturing sector, where activity contracted at its fastest pace since September 2022. The manufacturing PMI slumped to 48.3 in May, down from 50.4 in April, pulled lower by a significant decline in export orders, largely attributed to rising US tariffs on Chinese goods.
Services gain ground despite global headwinds
The services sector’s steady growth was underpinned by faster increases in new business, supported by efforts to broaden client bases and enhance outreach. Although new export orders fell for the first time in 2025, reflecting global trade frictions and tariff-related uncertainty, domestic demand proved strong enough to sustain expansion.
According to panellists, business development efforts and promotional activities played a key role in driving growth.
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To manage higher workloads, service providers modestly expanded their workforce in May, ending a two-month streak of job cuts. Employment growth, while slight, was the strongest since November 2024. The slower rise in backlogs of work indicated that increased staffing had helped ease pressure on operations.
“Both supply and demand grew at a slightly faster clip as businesses sought to acquire new clients,” said Dr. Wang Zhe, Senior Economist at Caixin Insight Group. “Business activity and total new orders both grew for the 29th consecutive month.”
Still, cost pressures intensified. Input cost inflation, driven by higher purchase prices and wages, accelerated to its fastest pace in seven months. Yet, in a bid to remain competitive, firms cut selling prices for the fourth consecutive month. The rate of discounting was the sharpest in eight months, as companies attempted to attract business in a challenging external environment.
Tariff strain dents growth
China’s overall economic momentum took a hit in May as the composite Caixin PMI which combines both manufacturing and services, fell to 49.6 from 51.1 in April. This marked the first contraction in overall activity since December 2022.
Manufacturing bore the brunt of the slowdown. The sector’s decline was driven by falling new orders, weakening export demand, and job cuts. The employment index for factories slipped for the second straight month. Inventory build-up at production sites also pointed to weakening domestic and international demand.
“The contraction in manufacturing weighed on the overall market,” Dr. Wang noted. “New export orders remained sluggish in both the manufacturing and services sectors. Uncertainty in the external trade environment has increased, adding to domestic economic headwinds.”
The impact of US tariffs was particularly visible in May, with the export orders index falling to its lowest level since July 2023. Despite a temporary 90-day pause in tariffs agreed between Beijing and Washington, investor sentiment remains fragile amid fears of prolonged trade tensions.
Policy support and consumer demand key
While overall business confidence improved slightly in May, optimism remains low. Firms are hopeful that easing trade tensions and improved global conditions could support future growth. Analysts suggest that targeted policy support and measures to boost household incomes will be essential to sustaining recovery.
“The lasting impact of earlier consumption-stimulating measures needs further evaluation,” Dr. Wang said. “More importantly, boosting domestic demand should be grounded in improving household incomes, employment, and social security.”
With manufacturing under strain and global uncertainty lingering, China’s services sector has become a crucial pillar for economic stability in China midway through 2025.