China’s services sector experienced its most robust expansion in seven months during December, driven by a notable surge in domestic demand. However, a concurrent decline in international orders has highlighted the growing external trade risks facing the world’s second-largest economy. This dual narrative emerged from the latest Caixin/S&P Global services purchasing managers’ index (PMI) report released on Monday.
The services PMI climbed to 52.2 in December from 51.5 in November, marking the highest growth since May 2024. The index remains above the 50-mark that demarcates expansion from contraction, suggesting a steady recovery in the services sector. This acceleration mirrors findings from China’s official PMI, which also recorded a recovery in non-manufacturing activities, rising to 52.2 from 50.0 in November.
The domestic demand surge reflects a concerted effort by Chinese authorities to revitalize the sluggish economy through an array of fiscal and monetary measures. These interventions have aimed to counterbalance the persistent challenges of weak consumption, fragile investment levels, and a protracted property sector crisis.
Wang Zhe, Senior Economist at Caixin Insight Group, remarked on the effectiveness of these policies: “Since late September, the synergy of existing policies and additional stimulus measures has continued to act on the market, producing more positive factors.”
Despite the uptick in domestic activity, the sub-index for new business inflows from abroad fell for the first time since August 2023. This drop in foreign demand underscores the looming risks posed by an increasingly volatile global trade environment. Companies are bracing for further headwinds, particularly with the anticipated implementation of higher U.S. tariffs on Chinese goods under the incoming Trump administration.
The labor market also reflected cautious optimism. While the services sector expanded, businesses trimmed staff numbers for the first time in four months, attributing the reductions to rising costs of inputs and wages. This labor market adjustment signals that while demand is rising domestically, companies remain vigilant about controlling costs amidst an uncertain economic outlook.
Wang highlighted the persistent external pressures and the necessity for proactive policy measures. “The external environment is expected to become more complex this year, requiring early policy preparation and timely responses,” he stated, alluding to the escalating trade tensions and the broader geopolitical landscape.
The trade environment is set to become more challenging with Donald Trump’s imminent return to the U.S. presidency. His administration has pledged to impose tariffs exceeding 60% on Chinese goods, a policy move that could significantly disrupt China’s export-driven growth. Exports, which have been a rare bright spot for China’s economy, may face severe constraints, amplifying the need for robust domestic demand to sustain economic momentum.
The Caixin/S&P Global Composite PMI, which amalgamates data from both the manufacturing and services sectors, saw a decline to 51.4 in December from 52.3 in November. This drop reflects the complex interplay of advancing domestic services and a contracting manufacturing sector weighed down by weakening external demand.
Business confidence, although still positive, dipped to its second-lowest level since March 2020. Companies cited rising competition and potential international trade disruptions as key concerns, emphasizing the uncertainty permeating both domestic and global markets.
China’s economic landscape remains fraught with both opportunities and challenges. On the domestic front, the positive impact of recent policy measures on services demand signals a potentially stabilizing economy. However, the external environment, characterized by escalating trade tensions and the prospect of higher tariffs, presents a significant downside risk.
The government’s recent stimulus initiatives, combined with a more accommodative monetary policy, aim to buffer the economy against these external shocks. However, analysts caution that the effectiveness of these measures will depend on their ability to sustain domestic demand and offset the expected decline in export revenues.
China’s policymakers are tasked with navigating a complex economic environment marked by internal vulnerabilities and external uncertainties. With global trade dynamics shifting and geopolitical tensions rising, early and strategic policy interventions will be crucial in ensuring sustained economic growth.
