China’s Services Sector Grows in May Despite U.S. Tariff Concerns

China’s services sector expanded slightly faster in May, with the Caixin/S&P Global Services PMI rising to 51.1 from 50.7 in April, signaling continued growth. The uptick was supported by stronger domestic new orders, even as new export orders declined amid persistent uncertainty over U.S. tariffs.

The Caixin survey, which tracks smaller and export-driven firms, echoed official PMI data showing services activity at 50.2. Analysts, however, warn that external demand risks remain due to ongoing trade tensions with the U.S., despite a temporary 90-day pause on new tariffs.

While the services sector showed resilience, a drop in manufacturing output led the broader Caixin China General Composite PMI to fall to 49.6 from 51.1—its first contraction since December 2022. The divergence highlights continued pressure on China’s industrial base despite efforts to stimulate domestic demand.

Input costs rose at their fastest pace since October 2024, driven by higher wages and purchase prices, but output charges continued to decline, squeezing profit margins. Employment remained stable overall, with some firms cutting costs through layoffs while others expanded staff to meet demand.

The central bank has eased monetary policy and lowered deposit rate ceilings to encourage spending, but economists say the impact of earlier stimulus measures remains limited. Caixin economist Wang Zhe emphasized that boosting domestic demand depends on improving household incomes amid growing external risks.

Despite current challenges, sentiment in the services sector remains optimistic, with businesses expecting recovery as tariff-related headwinds ease. However, weak export demand and persistent cost pressures pose ongoing risks to sustained growth.