China's Services Growth Slows as Trump Tariffs Weigh on Sentiment

China's services sector growth slowed in January, according to a private sector survey released Wednesday by Caixin and S&P Global, Reuters reports. The purchasing managers' index (PMI) dipped to 51.0, down from 52.2 in December, although it remained above the 50-mark that indicates expansion. This slowdown follows a similar trend in the official PMI, which also showed weakening services activity.

The Caixin survey revealed that new business growth eased to a four-month low, while employment fell at the fastest pace since April 2024. The decline in employment is attributed in part to the earlier-than-usual Lunar New Year holiday, which led to temporary closures and worker furloughs. The level of unfinished work also fell for the first time in six months, likely due to slower new business growth and improved working efficiency.

Despite the slowdown, business sentiment improved from December. However, several companies expressed concerns about rising competition and uncertainties surrounding international trade. These concerns are exacerbated by the recent imposition of 10% tariffs on Chinese goods by the US, prompting retaliatory measures from Beijing.

"The new duties will nearly double the effective tariff rate on Chinese imports (to the U.S.), but Chinese policymakers have ample scope to mitigate the damage to economic growth," said Thomas Gatley of Gavekal Dragonomics, in a note released on Monday.

Julian Evans-Pritchard, head of China economics at Capital Economics, suggests a potential silver lining, arguing that Trump's willingness to undermine US alliances could strengthen China's geopolitical position.

The composite PMI, encompassing both manufacturing and services, fell to 51.1 in January, marking the lowest growth rate in four months. This slowdown reflects the inability of faster manufacturing output growth to offset the softening services sector.

China is currently grappling with a prolonged property crisis that has dampened investment and confidence. In an effort to stimulate the economy, policymakers have prioritized domestic consumption. This is evident in the record box office revenue generated during the Lunar New Year holiday, driven by popular Chinese films and local government initiatives such as cinema voucher programs.