China’s services sector shows resilience despite looming U.S. tariff threats

China’s services activity grew modestly in May, with increased domestic demand. However, export orders suffered due to growing uncertainty from Washington’s latest moves on its tariff policy.

In May, the Caixin/S&P Global Services Purchasing Managers’ Index (PMI) came in at 51.1, up from 50.7 in April, as global services expanded, but it was a fragile recovery as the rest of the economy showed some strain.

The reading was in close agreement with the government’s official services PMI, which increased to 50.2 from 50.1. The Caixin PMI, which focuses on smaller, export‐oriented, private firms, gave a more nuanced view of how trade headwinds impact the economy beyond China’s dominant state‐owned enterprises.

Despite a sharp acceleration in new domestic orders, new export orders in the services sector dropped for the first time this year. Economists blamed the drop on escalating trade tensions between Beijing and Washington, with China reintroducing tariffs even after a 90-day suspension was signed in mid-May.

The bigger hit was in manufacturing. China’s Caixin China General Composite PMI fell to 49.6 from 51.1 in April, the first contraction in 17.5 months. The growth of services failed to offset the decline in factory activity as concerns about the resilience of China’s overall economy continue to deepen.

Central bank moves to support growth

In May, China’s central bank eased monetary policy in response to external shocks. Also, to stimulate domestic investment and spending, deposit rate ceilings were lowered. The changes are meant to alleviate the margin squeeze on banks and encourage savings in the economy.

Services sector employment metrics stayed just above the neutral 50 mark. While some companies cut back on staff to control costs, others added to staff as growing domestic demand needed to be satisfied.

Higher purchase prices and rising wages drove the fastest increase in input costs since October 2024. Output charges fell for a fourth consecutive month, prompting tighter margins.

Although the current headwinds left little room for optimism in the short term, most service businesses continued to look ahead with certainty for the coming year. Expectations of further policy support and stabilizing external trade conditions are tied to optimism.

U.S.-China talks stall as trade measures escalate

The 90-day tariff suspension deal between Washington and Beijing has stalled, with trade negotiations stuck. It is “extremely hard” to reach a deal with Chinese President Xi Jinping, President Donald Trump said Wednesday. His remarks came after an earlier surge in expectation of a possible call between the two leaders.

Treasury Secretary Scott Bessent said Thursday that talks were not progressing and might take a top-level intervention. While Beijing had publicly stated they are open to dialogue, the two presidents have not confirmed plans for a call.

Chinese officials and the White House continue to blame each other for breaking the agreement reached in Switzerland. China accused the U.S. of refusing to ease export controls on rare earths, while the U.S. said China was continuing to press ahead with technology restrictions and extra visa bans.

Chinese Foreign Minister Wang Yi denounced Washington during a Tuesday meeting with U.S. Ambassador David Perdue, saying Washington’s ‘negative measures’ went beyond what justified and violated China’s rights. Perdue spoke of President Trump having ‘great respect’ for Xi and hoping for cooperation in the official readout.

The tariff standoff has broader economic implications. Despite a predicted $2.8 trillion reduction in the federal deficit over the next 10 years, a recent Congressional Budget Office report found that Trump’s global tariff policy would reduce U.S. household purchasing power, increase inflation, and shrink the economy.

Your crypto news deserves attention - KEY Difference Wire puts you on 250+ top sites