China’s services activity in April 2025 has shown unexpected weakness, underscoring the growing economic challenges faced by the country. According to the Caixin China services purchasing managers' index (PMI), the index fell to 50.7, the lowest level in seven months. This result significantly missed economists' expectations, which were set at 51.8. A reading above 50 indicates expansion, while a reading below this threshold suggests contraction. The downturn in services is concerning as it comes at a time when the Chinese economy is already under strain from US tariffs and the broader trade conflict between China and the United States.

Impact of US Tariffs on Services and Business Activity

The US tariffs have caused significant disruptions in China’s trade and industrial activity, especially in the manufacturing sector. The services sector, though less directly affected by tariffs, is still feeling the indirect effects, with many service providers expressing concerns over the ongoing trade dispute. Wang Zhe, senior economist at Caixin Insight Group, noted in a statement that "Market improvements were limited amid the China-US trade row." The sub-index measuring future expectations for business activity dropped to one of its lowest points since the data began in 2005, only weaker in February 2020 when the COVID-19 outbreak caused severe disruptions. This highlights how deep the economic concerns run, with many businesses unsure about their future growth prospects.

Declining New Business Orders and Job Market Concerns

In addition to a reduction in activity expectations, the services sector also faced a decline in new business orders, which grew at the slowest pace since December 2022. This decline reflects weaker demand for services, which has led many firms to rethink their staffing requirements. For the second consecutive month, services firms reduced their workforce due to concerns over rising costs and declining demand. The employment sub-index pointed to further job losses, underscoring the broader job market slowdown within China.

The weak demand and the growing uncertainty in the services sector further add to the pressures on the broader Chinese economy. With the official PMI for non-manufacturing sectors also showing signs of weakness, dropping to 50.4 in April, the country’s GDP growth forecast has been revised down. The China GDP forecast for 2025 now stands at 4.2%, significantly below the government’s target of around 5%. This means that despite the government's push for growth, the actual output might fall short of expectations, indicating a slower-than-expected recovery.

China's Struggle to Boost Consumption and Mitigate Losses

One of the critical challenges faced by China is whether policymakers will be able to stimulate sufficient demand to offset the loss of export demand due to the trade war and US tariffs. Goldman Sachs has estimated that about 16 million people, or 2% of China’s labor force, could be directly exposed to industries hit by the US-bound exports. The slowdown in exports, combined with a weak job market, could hurt consumer spending, which is essential for sustaining economic growth.

Economic Outlook and Future Expectations

The economic outlook for China remains uncertain as the country grapples with the impacts of trade tensions and domestic economic challenges. China’s economy faces a complex balancing act: while policymakers have been making efforts to boost consumption and stabilize growth, the continued disruptions in global trade, particularly due to US tariffs, make it challenging to achieve the official GDP growth target. The question now is whether China’s policymakers can find ways to stimulate domestic consumption fast enough to offset the decline in export demand.

Conclusion

In summary, China’s services sector showed significant signs of stress in April, marked by weak PMI results, sluggish business orders, and further job cuts. These issues are compounded by the ongoing China-US trade row, which has affected economic sentiment and business activity. As China faces slower GDP growth projections for 2025, the question remains whether the government can implement effective policies to stabilize the economy and support consumer demand. For now, economic concerns are growing, and the potential for a further economic slowdown in the coming quarters looms large.

The coming months will likely be pivotal in determining the direction of China’s economic recovery, with close attention paid to how policy interventions and global trade conditions evolve

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