China Services PMI Signals Margin Pressures; AUD/USD and Hang Seng Drop

China’s Services Sector PMI Boosts GDP Growth Optimism

China’s services sector faced scrutiny after the manufacturing sector returned to expansion, signaling a robust third quarter.

On Wednesday, September 3, market attention turned to the RatingDog China General Services PMI. The Services PMI increased from 52.6 in July to 53 in August, suggesting Beijing’s measures to boost demand for services gained traction. The August survey revealed several key developments:

• New business rose for the second month and at the fastest pace since May 2024.
• A stronger increase in new export business contributed to the upswing in total new business.
• Despite the jump in new business, firms reduced staffing levels for the second time in three months due to cost concerns.
• Higher wages and raw material costs led to average input costs rising for the sixth consecutive month.
• However, rising competition forced service providers to absorb cost increases and lower output charges.

The pickup in service sector activity and the manufacturing sector’s recovery sent the RatingDog China General Composite PMI up from 50.8 in July to 51.9 in August.

However, Beijing may be concerned with two common themes across the services and manufacturing sectors. Stiff competition meant companies were unable to raise selling prices despite input prices increasing across the private sector. Margin pressures led companies to cut staffing levels across both sectors, potentially affecting domestic consumption.

More information in our economic calendar

Expert Views on China’s Services Sector

Yao Yu, founder of RatingDog, commented:

“Overall, the performance of the service sector in August was quite notable. However, the persistent pressure on output prices, and thereby profits, suggests that the service sector recovery may be imbalanced. While this short-term boost is positive for business activity, the ongoing pressure on corporate profits could create negative feedback in the long term.”

Underscoring the significance of price pressures and profit margins, Yao Yu concluded:

“Whether prices can be effectively passed on and if there are signs of improving domestic demand will be crucial for assessing the likelihood of a sustained economic recovery.”

The Market Reaction to the Services PMI

Financial markets responded swiftly to the PMI release, reflecting sentiment toward a robust Chinese economy.

Before the PMI data, the Hang Seng Index was up 0.85% to 25,713. However, in response to the August PMI report, the Index briefly rose to a high of 25,741 before sliding to a post-report low of 25,535.

On Wednesday, September 3, the Index was up 0.15% to 25,534 for the morning session. Price pressures and labor market trends weighed on sentiment, reversing earlier gains.

In the forex market, the AUD/USD had a mixed reaction to the PMI data, rising to a post-report high of $0.65248 before sliding to a low of $0.65209 over concerns about profit margins. On September 3, the AUD/USD was trading 0.33% lower at $0.62752.

The Australian dollar remains sensitive to developments in China’s economy and US trade policy.

What’s Next? US-China Trade Talks in Focus

Last week, China’s chief trade negotiator, Li Chenggang, met with US officials to discuss existing trade terms. Further progress toward a US-China trade deal could boost sentiment. However, the China Summit could draw criticism from President Trump, challenging hopes for better trade terms. Renewed US-China trade tensions could weigh on risk assets.

This week, President Trump targeted India, stating that India had offered to reduce US tariffs to zero, but it was getting late. Trump’s criticism came after the China Summit, where India, Iran, and Russia were among the nations aiming to forge stronger economic ties to limit the effect of US policies on global trade.

The August PMI numbers highlighted the need for lower tariffs to ease margin pressures and boost job hiring. A pickup in job creation could boost sentiment and private consumption, crucial for Beijing’s 5% GDP growth target.

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