China’s Services Activity Falls to 9-Month Low Amid Weak Consumer Demand

Key Takeaways:

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1. Services PMI Decline: The Caixin China Services PMI dropped to 50.6 in June, down from 51.1 in May, marking the lowest level in nine months and signaling a slowdown in services sector growth.
2. Consumer Caution: A weak jobs market and slower wage growth are dampening consumer confidence, with new export business for services declining and job shedding recorded for the third time in four months.
3. Price Cuts Amid Competition: Companies reduced selling prices at the fastest pace since April 2022, reflecting intense market competition and limited demand growth.
4. Limited Stimulus Outlook: Signs of improvement in manufacturing and construction have reduced expectations for further economic stimulus, despite persistent deflation and weak property prices.
5. Structural Challenges: Services consumption accounts for only 18% of China’s economic output, far below the U.S. level, highlighting structural imbalances in China’s economy.

What Happened?

China’s services sector growth slowed significantly in June, with the Caixin Services PMI falling to 50.6, just above the 50-point threshold that separates expansion from contraction. The decline reflects weak consumer demand, driven by a sluggish labor market and slower wage growth.

New export business dropped at the fastest rate since December 2022, while companies cut prices to remain competitive. Job shedding in the sector persisted, further weighing on consumer sentiment.

Despite these challenges, manufacturing and construction showed signs of improvement, leading China’s central bank to issue a more optimistic economic outlook. However, weak property prices and deflation continue to undermine household wealth and confidence.

Why It Matters?

The slowdown in China’s services sector underscores the fragility of its post-pandemic recovery, with consumer demand remaining a key weak spot. Services consumption, which accounts for only 18% of GDP, lags significantly behind global benchmarks, limiting its contribution to economic growth.

The data also raises questions about the effectiveness of China’s economic policies, as the government balances the need for stimulus with concerns about rising debt and structural imbalances. For global markets, the slowdown in China’s services sector could dampen demand for imports and weigh on global growth prospects.

What’s Next?

Analysts will closely monitor whether the government introduces targeted measures to boost consumer spending and services demand, particularly as higher U.S. tariffs pose additional risks to exports.

The federal stimulus outlook remains uncertain, with policymakers likely to focus on stabilizing property prices and addressing deflationary pressures. The trajectory of China’s services sector will be critical in determining whether the economy can achieve its 5% growth target for the year.