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China’s services sector activity reached a three-month high in March, with the Caixin/S&P Global Services PMI rising to 51.9 from 51.4 in February. This increase was influenced by stronger domestic demand and a notable rise in new business, the fastest growth in new orders since December.
The official PMI also reflects improvement, rising to 50.3 from 50.0, indicating a modest recovery in the economy. However, new U.S. trade tariffs, including a 10% baseline tariff on all imports and a 54% levy on Chinese goods, raise concerns about export risks and overall business confidence.
Analysts caution that these tariffs may negatively affect China’s manufacturing sector and impact job prospects, especially in services, which accounts for nearly half the workforce and over 56% of GDP. Despite steady demand, the services sector experienced its largest employment decline in nearly a year as businesses undertook staff cuts due to resignations and cost pressures.
Cost Pressures And Employment Impact
Input costs increased, but service providers refrained from raising prices, resulting in a six-month low for output charges. Business sentiment is positive, with firms optimistic about domestic policy support sustaining growth, though economists are urging more proactive measures to counter external pressures.
While services activity returned to a healthier pace in March, with figures suggesting stronger underlying demand, the surface-level optimism belies some persistent weaknesses. The highest reading of the Caixin/S&P Global index in three months reflects a domestic backdrop that has shown momentary resilience, especially in terms of consumer-facing businesses and digital services. However, the divergence between stable headline numbers and weaker hiring trends should not be dismissed as a temporary imbalance—it points to deeper concerns among firms about sustaining cost structures amidst uncertain margins.
The improvement in the official PMI nudging just above the 50-mark points to borderline expansion. This sort of number often triggers a cautiously constructive mood on paper. But when matched with the substantial fall in employment within the services space—the sharpest drop in nearly 12 months—it raises flags about business sentiment underneath the surveys. The inclination seems to lean towards protecting operating margins amid tight budget conditions rather than pursuing full-scale business expansion.
Inflation Risks And External Pressure
On pricing, despite an increase in input expenses—such as rent, materials, and energy—firms have not passed these through to customers. It’s telling. It suggests a delicate balance between cost recovery and customer retention, with businesses wary that price hikes could swiftly dampen demand even as orders start to climb again. Output prices, now at their lowest since September last year, offer an unambiguous reading of just how cautious firms have become.
Lingering in the background are the new U.S. trade tariffs, which have reintroduced inflationary and supply chain pressures at a time when China’s manufacturing sector is still navigating post-pandemic capacity constraints. These penalties create ripple effects not limited to factories; downstream industries that rely on cross-border supplies or overseas demand, including many service providers, face uncertain prospects in terms of volume and confidence. The impact is multi-layered, from employment to logistics.
From a trading stance, the divergence between domestic improvements and external headwinds requires more precision. We are seeing a market dynamic where short-term signals are relatively strong but longer-term projections remain sensitive to policymaking and foreign developments. Recent policy signals suggest the door remains open for fiscal and regulatory intervention, likely aimed at credit flows and smaller firms that feed into the services ecosystem.
That said, the fall in service sector employment must be read not just as a softening of demand, but also as a potential prelude to wider cost-cutting or a signal that current output gains may not be matched by parallel investment in personnel. It reinforces an expectation that any sustained rebound will need more than consumer stability—it depends on confidence returning across hiring, pricing, and investment.
Given this, the next few weeks could bring a tug-of-war between improving demand readings and macro uncertainty. As a result, focus should stay on tracking the correlation between these high-frequency business activity indices and measures of inflation, especially within service-heavy sub-sectors like hospitality and logistics. This matters for gauging margin pressure and potential downstream effects across other asset classes.
In the broader picture, expectations around business sentiment, particularly when turnover remains stable but headcounts are trimmed, deserve close watching. Sentiment gauges do not yet reflect worsening conditions, but the combination of policy dependence and external threat builds room for sharper volatility, especially when the macro news flow falls short of market pricing.
From here, our eyes remain on whether companies begin to reconsider their reticence on price-setting and what this means for input-output balances in Q2. For derivative positioning, reading between these consumption trends and cost absorption remains key.
