China’s services sector has encountered unexpected headwinds as economic momentum continues to face persistent challenges across multiple fronts. The world’s second-largest economy is grappling with structural issues that extend beyond traditional cyclical patterns, affecting both domestic and international business confidence. Recent data reveals concerning trends that could signal broader economic implications for global markets and trade relationships.
Expansion in the services sector slows due to a decline in business confidence
The pace of service sectors in China eased to a six-month low in December, backed by slowing growth in the industry. The slowdown is despite efforts by the Chinese government to promote economic growth by implementing various policies. The growth of new business eased to a six-month low, an aspect that can affect the performance of China’s economy.
Business attitudes have shown mixed trends, with the degree of expectation reaching a nine-month peak, although the levels of current activity have remained weak. The fact that firms are optimistic about the market conditions and plans for growth in 2026 implies confidence about the recovery prospects. Nevertheless, difficulties are currently hindering the levels of operational performance.
Data from PMI indicates some worrying trends in economic performance
The RatingDog China General Services PMI, calculated by S&P, slightly retreated to 52.0 in December from the previous month’s reading of 52.1, registering the weakest level since June. Though the PMI continued to remain in the expansion zone, as indicated by the level above the 50 mark, the slight decline indicated that the momentum of growth is slowing down in the various sectors. Services related to exports dipped into contraction from the previous month, largely due to the impact of reduced tourist arrivals.
Input prices continued their upward movement for the tenth consecutive month, driven by increasing raw material and labor costs. Nonetheless, the companies reduced their prices amid rising competition, hence applying downward pressure on profit margins. The pricing behavior shows the challenges faced by Chinese service providers in the market. The companies are struggling to ensure they remain profitable amid competition for market share.
Cutbacks in employment continue despite growth in activity levels
Jobs have been reduced for the fifth consecutive month, with a reduction in full-time and part-time employees, and this contributed to the minor backlog of jobs, despite the growth rate remaining positive. The jobs market reflects the misalignment of growth and employment within the Chinese economy. These developments come at a critical time when policymakers are implementing various stimulus measures to maintain growth targets.
Structural problems continue despite government intervention activities
The Chinese economy has been lagging in efforts to regain pace despite challenges such as a slowdown in the real estate sector and deflation. China has intensified its fight against overcapacity and reduced pricing among the companies that fall within its control as it strives to address the challenge of deflation. Chinese policymakers are intent on pursuing an “active” fiscal policy in the coming year.
The Composite Output Index, based on the performance of both the manufacturing and services sectors, was shown to have a slight increase to 51.3 from a previous figure of 51.2. Despite the slight increase, it is, however, an indicator that there are indeed several challenges that the growth of the particular sector is facing if it is to register a comprehensive recovery.
Currently, China’s service sector is experiencing an environment that has been driven towards balanced growth, but has expressed optimism towards improvement. Although optimism has been expressed among firms concerning the year 2026, there are short-term challenges, such as layoffs, pricing, and international demand changes, that continue to inhibit the sector’s performance. The sector may benefit from the government’s emphasis on active fiscal policies.
