China May services activity grows despite US tariff concerns, Caixin PMI shows

China's services sector saw slightly faster expansion in May, with the Caixin/S&P Global services PMI rising to 51.1, driven by increased new orders; however, new export orders declined due to U.S. tariff uncertainty. Despite the services growth, the Caixin China General Composite PMI fell to 49.6, signaling the first contraction since December 2022, as manufacturing production dropped and businesses faced rising input costs coupled with weakening selling prices. Analysts remain concerned about the impact of U.S. tariffs on China's economic momentum despite government efforts to stimulate domestic demand and ease monetary policy.

Analysis

China's services sector demonstrated a marginal acceleration in May, with the Caixin/S&P Global services PMI rising to 51.1 from 50.7, supported by faster growth in new domestic orders. However, this expansion was counterbalanced by a decline in new export orders within the services sector, the first this year, attributed to uncertainty surrounding U.S. tariffs. More broadly, the Caixin China General Composite PMI contracted to 49.6 from 51.1, its first sub-50 reading since December 2022, indicating that modest services growth was insufficient to offset a decline in manufacturing production. Businesses are confronting intensified profit pressures, evidenced by rising average input costs—with service sector input cost inflation reported as the fastest since October 2024—alongside continuously weakening selling prices, which declined for the fourth consecutive month in May. Despite monetary policy easing by the central bank, including lowering the ceiling for deposit rates, significant headwinds persist from external trade uncertainties and the challenge of effectively stimulating domestic demand, which Caixin Insight Group suggests should be anchored to improvements in household income.

Key Decisions for Investors

• Investors should exercise heightened caution regarding Chinese assets, particularly those with significant exposure to export-oriented manufacturing, given the contraction in the composite PMI and ongoing U.S. tariff uncertainties.
• Closely monitor upcoming Chinese economic data, specifically manufacturing PMIs, trade figures, and any developments in U.S.-China trade negotiations, for indications of economic stabilization or further deterioration.
• Scrutinize companies within the Chinese services sector for their ability to withstand declining export demand and manage escalating margin pressures stemming from rising input costs and falling output prices.
• Identify potential investment opportunities in sectors that could benefit from further domestic stimulus measures, should Beijing implement more substantial policies aimed at boosting household income and consumption to counter prevailing economic headwinds.