China's services sector expands in May despite U.S. tariff concerns, Caixin PMI shows

China’s services activity expanded at a modestly faster pace in May, driven by stronger domestic demand, though new export orders declined amid growing concerns over U.S. tariffs, according to a private sector survey released on Thursday.

The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 51.1 in May from 50.7 in April, staying above the 50-point mark that separates growth from contraction. The result aligns with the official PMI, which recorded a slight uptick to 50.2, and suggests continued resilience in the services sector despite external pressures.

The Caixin survey, which focuses more on smaller and export-driven firms, particularly in China’s eastern coastal regions, indicated a pickup in new domestic orders. However, export-oriented businesses faced a setback, with new export orders declining for the first time this year, reflecting uncertainty surrounding trade tensions with the United States.

"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.

While optimism about future business conditions remained strong, particularly as Beijing and Washington entered a 90-day tariff reduction pause, analysts warned that prolonged uncertainty could weigh on China’s economic momentum. Despite a stronger-than-expected GDP growth in the first quarter, external risks and domestic challenges continue to loom.

The Caixin China General Composite PMI, which combines manufacturing and services activity, fell to 49.6 in May from 51.1 the previous month, marking the first contraction since December 2022. This suggests that while the services sector showed resilience, it was not enough to counterbalance a slowdown in manufacturing output.

Employment indicators in the services sector remained slightly above 50, signaling modest job creation. Some firms cut headcounts to reduce costs, while others hired more workers to meet demand. Input cost inflation rose at its fastest pace since October 2024, mainly due to rising purchase prices and wages. However, companies continued to lower selling prices, putting additional pressure on profit margins.

“Currently, unfavourable factors remain relatively prevalent. Uncertainty in the external trade environment has increased, adding to domestic economic headwinds,” Wang said. “More importantly, boosting domestic demand should be grounded in improving household incomes.”

In response to mounting pressures, China’s central bank last month introduced new easing measures, including a reduction in the ceiling for deposit rates and additional credit support for small and medium enterprises, in an effort to sustain growth and mitigate the impact of the ongoing trade frictions.

Despite near-term challenges, businesses surveyed remained optimistic that the negative effects of the tariff dispute may gradually ease, and that broader policy support will continue to bolster domestic demand in the months ahead.

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