• China's services PMI rose to 51.1 in May, indicating growth.
• New export orders declined due to ongoing US tariff uncertainties.
• The overall sentiment in the services sector remains positive despite economic headwinds.

According to a private sector survey, China’s services activity expanded at a slightly faster pace in May, with new orders increasing faster than in April. The Caixin/S&P Global services purchasing managers' index (PMI) increased to 51.1, remaining above the crucial 50-mark that signals expansion, up from 50.7.

This reading aligns closely with China’s official survey, which also showed a slight uptick in services activity, rising to 50.2 from 50.1 in the previous month. Notably, the Caixin PMI represents smaller, export-oriented firms, particularly along the east coast, while the official PMI focuses primarily on larger and medium-sized enterprises, including state-owned companies, according to Reuters, Channel News Asia, and South China Morning Post.

Despite the growth in services, analysts express concern that US tariffs could significantly dampen economic momentum. Beijing and Washington are working on a 90-day pause to cut import tariffs, which raises hopes of improving trade relations. However, uncertainty remains as investors worry that negotiations may not advance swiftly amidst broader global economic risks, reports Reuters, Channel News Asia, and South China Morning Post.

Furthermore, new export orders have shown signs of decline, marking the first drop in 2023, indicating sluggishness in foreign demand. Zhe Wang, a senior economist at Caixin Insight Group, noted that “average costs for businesses rose slightly, but selling prices continued to weaken, increasing profit pressure.” This situation suggests that while service activity is expanding, external challenges are weighing on profitability, according to Reuters, Channel News Asia, and South China Morning Post.

Moreover, the Caixin China General Composite PMI registered a drop to 49.6 from 51.1, indicating the first contraction in manufacturing since December 2022. The central bank recently implemented measures to alleviate the impact of the trade tensions with the US, including easing monetary policy and lowering deposit rate ceilings to encourage spending and investment, as per Reuters, Channel News Asia, and South China Morning Post.

Despite these challenges, there remains a positive sentiment over the next 12 months, with companies hopeful the adverse effects of US tariffs will lessen over time. However, uncertainty in external trade conditions persists, contributing to economic headwinds. Wang emphasizes that "the lasting impact of earlier consumption-stimulating measures needs further evaluation," and notably, boosting domestic demand should rely on enhancing household incomes, according to Reuters, Channel News Asia, and South China Morning Post.