China May services activity grows despite US tariff concerns, PMI at 51.1

Business Standard

3 days ago

China's services activity expanded at a slightly faster pace in May, with new orders growing more quickly than in April, though new export orders declined due to uncertainty stemming from US tariffs, a private sector survey showed on Thursday.
The Caixin/S&P Global services purchasing managers' index (PMI), rose to 51.1 in May from 50.7, remaining above the 50-mark that separates expansion from contraction.
The reading was broadly in line with China's official survey, which showed services activity edging up to 50.2 from 50.1 the previous month. The Caixin PMI is considered a better read of trends among smaller, export-oriented firms, particularly along the east coast, while the official PMI primarily tracks large and medium-sized enterprises, including state-owned companies.
China's economy grew faster than expected in the first quarter, and the government has maintained its annual growth target of around 5 per cent. However, analysts warn that US tariffs could significantly dampen momentum.
Beijing and Washington have agreed to a 90-day pause during which both would cut import tariffs, raising hopes of easing tensions. Yet investors remain concerned that negotiations could progress slowly amid persistent global economic risks.
"On the external demand front, new export orders remained sluggish in both the manufacturing and services sectors. Average costs for businesses rose slightly, but selling prices continued to weaken, increasing profit pressure," said Zhe Wang, senior economist at Caixin Insight Group.
However, faster services growth failed to offset a drop in manufacturing production. The Caixin China General Composite PMI fell to 49.6 from 51.1 the previous month, marking the first contraction since December 2022.
Last month, the central bank eased monetary policy to limit damage from the trade war with Washington, and lowered the ceiling for deposit rates to offset margin pressure on banks and prompt savers to spend or invest more.
Both supply and demand expanded at a slightly quicker pace, as businesses sought to attract new clients. However, foreign demand weakened due to US-China tariff uncertainty, with new export orders declining for the first time this year, the survey showed.
Employment-related indices remained slightly above the 50-mark. Some firms continued to reduce headcounts to cut costs, while others hired more workers to meet rising demand.
Service sector businesses faced the fastest input cost inflation since October 2024, driven by higher purchase prices and wages. Average output charges declined for the fourth month in a row in May.
Overall sentiment over the next 12 months remained positive in the sector, with companies optimistic that the negative effects of US tariffs may diminish over time.
"Currently, unfavourable factors remain relatively prevalent. Uncertainty in the external trade environment has increased, adding to domestic economic headwinds," said Wang "In terms of policy, the lasting impact of earlier consumption-stimulating measures needs further evaluation," Wang added "More importantly, boosting domestic demand should be grounded in improving household incomes."