China’s services sector growth accelerates in May, but rising costs cloud outlook – Firstpost

China’s services sector gathered momentum in May as stronger domestic demand and a rebound in overseas orders helped activity expand at its fastest pace in three months, offering fresh evidence that parts of the economy are stabilising.

However, a sharp rise in fuel, wage and procurement costs threatens to erode corporate margins and complicate Beijing’s efforts to sustain a broader recovery.

A private survey released on Wednesday showed the RatingDog China General Services Purchasing Managers’ Index (PMI), compiled by S&P Global, climbed to 54.4 in May from 52.6 in April. The reading remained comfortably above the 50-point threshold that separates expansion from contraction and marked the strongest growth in the services sector since February.

The survey adds to signs that China’s economy regained some traction during the month after a sluggish April, when uncertainty around global trade and weak domestic demand weighed on business sentiment.

Demand improves, export orders return to growth

The services rebound was driven by a notable improvement in new business, with companies reporting stronger customer demand, successful client acquisition efforts and the introduction of new products and services.

Importantly for policymakers, overseas demand also showed signs of recovery. New export business returned to growth in May after contracting in April, suggesting that external demand for Chinese services has started to recover despite lingering concerns about the global economic outlook.

The stronger pipeline of orders translated into higher workloads, prompting service providers to increase staffing levels for the first time in four months as outstanding business volumes rose.

The survey’s findings broadly mirrored official data released on Sunday, which showed China’s non-manufacturing sector returning to expansion in May. While the official and private surveys cover different samples of companies, both point to improving activity across the services economy.

Cost pressures intensify

Beneath the stronger headline growth figures, however, businesses reported mounting cost pressures that could limit profitability in the months ahead.

Input prices rose at the fastest pace since October 2024, fuelled by higher oil and fuel costs, rising procurement expenses and increased labour costs, according to the survey.

The acceleration in input inflation comes at a delicate time for Chinese companies, many of which continue to operate in a highly competitive environment where passing higher costs on to customers remains difficult.

The persistence of cost pressures could therefore squeeze margins even as revenues improve, creating a new challenge for service-sector firms seeking to capitalise on the recovery in demand.

Confidence remains resilient

Despite the rise in operating costs, businesses remained optimistic about the outlook over the next 12 months. Firms cited expectations of stronger market conditions, new business opportunities and continued economic stabilisation as reasons for their positive outlook.

The broader economy also showed signs of strengthening. The Composite Output Index, which combines manufacturing and services activity, rose to 54.0 in May from 53.1 in April, indicating a faster pace of overall business expansion.

For Beijing, the latest survey offers encouragement that policy support measures are helping underpin activity in the services sector, a key source of employment and domestic consumption. Yet the data also underscore the uneven nature of China’s recovery, with rising input costs emerging as a potential headwind just as demand begins to improve.

With inputs from Agencies.