China’s Economic Outlook Clouded by Tariffs Despite Services Sector Resilience

China Services and Manufacturing Sectors Diverge as Tariffs Bite

China’s services sector was in the spotlight on Tuesday, August 6, amid concerns that US tariffs were impacting more than trade terms. The S&P Global China General Services PMI unexpectedly rose from 50.6 in June to 52.6 in July, signifying a sharper pickup in domestic demand.

According to the July survey, key trends included:

• New work increased at the fastest pace in a year.
• External demand rose for the first time in three months. Firms attributed the rebound to increased tourism and stable trade conditions.
• Service providers increased staffing levels after June’s cuts. Notably, staffing levels rose at the sharpest rate since July 2024.
• Service providers raised output prices, passing higher input costs on to customers. Notably, selling prices increased for the first time in six months.

Despite the pickup in service sector activity, the S&P Global China General Composite Index fell from 51.3 in June to 50.8 in July. The S&P Global China General Manufacturing PMI dropped from 50.4 in June to 49.5 in July, falling below the crucial neutral 50 level, signifying a sector contraction.

In contrast to the services sector, manufacturers reported a decline in both domestic and external demand, as well as increasing price margin pressures, forcing companies to cut jobs. President Trump’s tariff policies have weighed on demand for Chinese goods, affecting manufacturers.

Jingyi Pan, Economist Associate Director at S&P Global Market Intelligence, remarked:

“Notably, the latest survey signaled a fresh increase in output charges in July, which also indicated improved confidence as firms were comfortable to pass on higher costs to clients for the first time in six months. Overall, the service sector fared better in July, which contrasted with the slowing trend seen for manufacturing.”

Market Reaction: Hang Seng Dips as Broader Private Sector Sees Slower Growth

July’s upswing in services sector activity failed to lift market sentiment. The Composite PMI’s decline underscored the manufacturing sector’s greater impact on the broader Chinese economy, weighing on sentiment.

The Hang Seng Index dropped into negative territory after the release of the July services PMI before steadying later in the morning session. At the time of writing, the Hang Seng Index was up 0.11% to 24,760 on hopes for a US-China trade deal and fresh stimulus measures from Beijing.

US Administration Plans Rules of Origin

Concerns about China’s economic outlook have pulled the Hang Seng Index back from its three-and-a-half-year high of 25,736 on July 24. Two days of high-level talks failed to yield a trade deal, leaving existing tariffs in effect.

Notably, President Trump is reportedly targeting transshipments, potentially affecting China’s attempts to bypass US tariffs on direct shipments to the US. China Beige Book reported:

“In addition to the new 40% tariffs on transshipment, the Trump administration plans to put in place so-called rules of origin for indirect shipments in a few weeks.”

The US recently introduced a 40% tariff on transshipments through Vietnam, one of China’s key Southeast Asian trade routes. Notably, Indonesia agreed to a 19% tariff on shipments to the US.

Chinese exports to the US fell 16.1% year-on-year in June, while exports to Southeast Asia, including Indonesia and Vietnam, rose 16.8%. The pickup in exports to Southeast Asia contributed to a 5.8% year-on-year increase in Chinese exports (May: +4.8%). Trade terms bolstered China’s economy, which expanded 5.2% year-on-year in the second quarter (Q1: +5.4%).

US tariffs targeting transshipments and existing levies on Chinese goods may adversely impact trade terms and China’s broader economy. Trade developments spotlight ongoing US-China negotiations.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero recently warned of a potential slump in Chinese exports, stating:

“Export growth might slow to 2-3% year on year in the third quarter of this year, and perhaps just 1% in the last quarter. Shipments of low-value goods, which can easily be manufactured elsewhere—such as furniture, clothes, shoes, and toys—to be most affected. Bicycles originally intended for export to America are already on sale at low prices on Chinese e-commerce sites.”

Mainland China Equity Markets Advance Amid Economic Uncertainties

Mainland China’s equity markets have held their gains despite weaker manufacturing PMI data and the prospect of tariffs targeting transshipments.

The CSI 300 has risen 0.22% in August to date after advancing 3.54% in July. Meanwhile, the Shanghai Composite Index is up 0.81% in August to date, following July’s 3.74% gain. Hopes of a trade deal and Beijing’s pledges to introduce stimulus have bolstered demand for Mainland China-listed stocks.

The Hang Seng Index has also extended its 2.91% gain from July, rising 0.11% in August to date. In contrast, the Nasdaq Composite Index has dropped 0.33% this month after gaining 3.7% in July.

Outlook

US-China trade talks, trade data (out on August 7), and Beijing’s stimulus measures will influence risk appetite. Easing US-China trade tensions and meaningful stimulus, targeting domestic consumption, may lift demand for Hong Kong and Mainland-listed stocks. Conversely, renewed trade tensions and the absence of stimulus could impact sentiment.

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