China Services Activity Stumbles; Tariff Fears Undermine Jobs Boosting Stimulus Hopes

Economic Alarm Bells Ring: China Services Activity Slows

China’s service sector lost momentum in April, reigniting concerns about the nation’s post-pandemic recovery and global trade risks. The Caixin Services PMI slipped to 50.7, its weakest since September, missing forecasts and fueling speculation over new stimulus measures. With US-China trade tensions intensifying, the data adds pressure on Beijing to act swiftly to shore up growth.

The April survey highlighted several troubling trends, including:

• The rate of growth was the softest since September despite Beijing’s efforts to boost domestic demand and consumption.
• New export business increased at the slowest pace in 28 months, with firms attributing the slowdown to goods trade disruption.
• Sentiment tumbled to the second-lowest since records began in November 2005.
• Service providers cut staffing levels for a second consecutive month amid rising prices and tariff uncertainty.
• While average input costs accelerated, firms cut output prices to bolster sales amid an increasingly competitive backdrop.

Dr. Wang Zhe, Senior Economist at Caixin Insight Group, highlighted emerging risks in the labor market:

“Employment shrank for the second straight month, marking the fourth contraction in the past five months. Businesses cut staff to save costs. The shrinking job market led to increases in backlogs of work, pushing the corresponding gauge above the expansion line for the first time this year.”

China Labor Market Trend Challenges Stimulus Targeting Consumption

April’s Services PMI mirrored a similar trend to the manufacturing sector. The Caixin Manufacturing PMI fell from 51.2 in March to 50.4 in April. Weaker new orders prompted layoffs. A deteriorating labor market could further impact consumer confidence, undermining the effectiveness of any stimulus aimed at boosting consumption.

CN Wire remarked on the shift in economic momentum, stating:

“Despite a strong start to the year, the economy now faces the risk of a sharp slowdown in Q2. Official data showed factory activity was already affected by steep U.S. tariff hikes in April, raising concerns over whether domestic consumption can offset declining export demand. Bloomberg analysts project GDP growth will slow to 4.2% in 2025, well below the government’s 5% target recently reaffirmed by Finance Minister Lan Fo’an.”

CN Wire also noted on consumer spending:

“Consumer spending will largely depend on job market stability, with Goldman Sachs estimating that 16 million workers, over 2% of the labor force, may be exposed to exports bound for the US.”

Rising Tensions: Trade Talks and Tariff Threats

April’s Caixin PMI surveys raise two critical concerns. First, China may lack leverage in US-China trade negotiations if no progress is made. Second, President Trump could escalate tariffs to win concessions from Beijing. Nonetheless, signs suggest China is unlikely to yield easily, pointing to rising tensions between the two powers.

On Monday, May 5, President Trump proposed a 100% tariff on foreign films. However, there were signs of optimism. Trump reportedly said China wants a deal, while Treasury Secretary Scott Bessent expressed confidence in upcoming negotiations.

Hong Kong and Mainland Markets Rise in Post-Holiday Trading

Mainland China’s equity markets resumed trading on Tuesday, May 6, to a mixed backdrop of economic data and trade developments. The CSI 300 rose 0.85%, while the Shanghai Composite Index gained 0.84% in morning trading.

Gaming shares rallied as Chinese tourists traveling to Macau, Asia’s Las Vegas, reportedly surged 40.8% year-on-year during the May Day Holiday. The data suggests consumers hope Beijing could mitigate tariff risks with fresh stimulus.

Hong Kong’s Hang Seng Index also opened higher, rising 0.81% in the morning session. In contrast, the Nasdaq Composite Index fell 0.74% overnight, bringing year-to-date losses to 7.59%, significantly steeper than the CSI 300’s 3.36% drop.

Outlook

US-China trade developments will remain key drivers of market sentiment. Constructive dialogue could lift demand for Mainland and Hong Kong equities, while escalating tensions may bolster safe-haven flows.

While headlines continue to drive volatility, further stimulus from Beijing, especially if focused on jobs and consumption, could support equities.

Currency markets also require consideration. A Yuan devaluation could signal a more confrontational posture toward Washington, possibly triggering risk aversion. The USD/CNY pair tumbled 0.61% to $7.2260 in early trading on May 6, a positive sign for markets. Year-to-date, the pair is down 1%.

Stay with us for continued updates on China’s economic outlook, trade developments, and global market reactions.