July Services PMI Slumped to 50.4, with Signals of Weakening Domestic Demand and Cooling Inflation

Overview

The report comments on the July RatingDog China Services PMI and provides July inflation forecasts. The services PMI fell sharply from 54.1 in June to 50.4, only slightly above the boom-bust line, indicating that services activity was still expanding but momentum weakened notably. The demand, backlogs, employment, and export orders subcomponents all declined; meanwhile, the input and output price indices fell, showing continued easing of cost pressures. The report forecasts July CPI at 0.9% YoY and PPI at 4.0% YoY.

Core views

Services sector sentiment cooled significantly in July, with both RatingDog and official services PMI readings declining. The new business index fell considerably, while company feedback indicated that overseas customer demand was still supported by factors such as exhibitions, study tours, and settlement services; therefore, the overall weakening in orders is more likely attributable to sluggish domestic services demand. Price subcomponents declined in tandem, implying that slowing demand is weakening pricing pressures in the services sector. On inflation, pork prices may push food inflation slightly higher YoY, but non-food inflation is expected to slow; falling energy prices may cause PPI to decline again on a sequential basis.

Analysis framework

The report uses the headline services PMI and subcomponents such as new business, outstanding business, employment, new export orders, input prices, and output prices to assess changes in services sector activity, and compares the actual reading with Goldman Sachs forecasts, Bloomberg consensus expectations, and the previous month's data. The inflation forecasts incorporate high-frequency food prices, PMI price signals, and changes in energy prices to assess trends in food, non-food, and industrial goods prices respectively.

Methodology notes

• Business sentiment analysisPMI diffusion index framework

  Using 50 as the dividing line between expansion and contraction

  A PMI above 50 typically indicates sequential expansion in business activity, while below 50 indicates contraction; the index falling from 54.1 to 50.4 means the services sector is still expanding, but the pace of expansion has slowed significantly.

• Expectation gap analysisComparison of actual and forecast values

  Assessing the degree of surprise by comparing actual data deviations from institutional forecasts and market consensus expectations

  The July services PMI was 50.4, below Goldman Sachs' forecast of 53.9 and the Bloomberg consensus expectation of 53.7, respectively, constituting a clear negative data surprise.

• Inflation forecastingHigh-frequency price tracking and subcomponent projection

  Forecasting CPI and PPI by combining food, non-food, and energy price signals

  The assessment of food inflation mainly references high-frequency food prices and pork prices, non-food inflation references PMI surveys, and the PPI forecast focuses on changes in energy prices.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese government bonds

  Slowing services activity and easing inflation pressures may strengthen expectations of policy easing

  Strengths

  A low-inflation and weak-growth environment is generally favorable for bond valuations.

  Weaknesses

  If actual inflation is higher than expected or policy leans more toward fiscal expansion, the room for yields to decline may be limited.

  Comparison

  Compared with risk assets, interest rate bonds are more directly sensitive to weakening growth and cooling prices.

  Risks

  Stronger-than-expected policy implementation, a rebound in energy prices, and supply pressures may push yields higher.

• Chinese equities

  Slowing domestic demand pressures earnings related to services consumption, but expectations of policy support may provide a buffer

  Strengths

  Further growth-stabilization measures may improve risk appetite and earnings expectations.

  Weaknesses

  Weakening new business and employment subcomponents reflect declining corporate revenue and demand visibility.

  Comparison

  Export-related demand is relatively more resilient than domestic services demand, and domestic-demand-sensitive sectors face more pronounced pressure.

  Risks

  Persistently weak demand, declining pricing power, and pressure on profit margins.

• Renminbi

  Weakening growth momentum and potential easing expectations may create fundamental pressure

  Strengths

  Relatively resilient overseas services demand may provide some support to the external balance.

  Weaknesses

  Weakening domestic demand and cooling inflation may widen policy divergence with other economies.

  Comparison

  Renminbi performance will also depend on the US dollar trend and China-foreign interest rate differentials, rather than being determined solely by the services PMI.

  Risks

  Changes in external interest rates, capital flows, and policy expectations may amplify exchange rate volatility.

Key data

• July services PMI50.4June was 54.1, the lowest since September 2024; Goldman Sachs' forecast was 53.9, and the Bloomberg consensus expectation was 53.7.
• July new business index50.9June was 53.1, indicating a clear slowdown in new demand.
• July outstanding business index50.8June was 51.6.
• July employment index50.8June was 51.1, indicating weaker employment expansion momentum.
• July new export orders index52.0June was 52.9, still above the boom-bust line.
• July input price index50.6June was 51.5, with cost pressures continuing to ease.
• July output price index50.8June was 51.1; services companies were still raising prices, but price momentum weakened.
• July CPI forecast0.9% YoYJune was 1.0% YoY; the annualized sequential forecast is -1.0%, and the Bloomberg consensus expectation is 0.8% YoY.
• July PPI forecast4.0% YoYJune was 4.1% YoY; the annualized sequential forecast is -2.5%, and the Bloomberg consensus expectation is 3.8% YoY.

Impact & implications

The sharp pullback in services sector sentiment reinforces the view that China's domestic demand recovery remains unstable and may reduce short-term core inflation and corporate pricing power. If subsequent official data confirm a simultaneous weakening in demand and price pressures, the need for macro policy to maintain a supportive stance will increase. For markets, low inflation and slowing growth are generally relatively favorable for interest rate bonds, but may weigh on equity sectors dependent on domestic consumption and services demand, and exert some growth-fundamental pressure on the renminbi. The above asset implications are macro transmission inferences based on the report data; the report itself does not provide specific trading recommendations.

Risks

• A single month of PMI may be affected by seasonality, survey samples, and short-term activity disruptions, and may not necessarily represent a sustained trend.
• Food prices, especially pork prices, may deviate from high-frequency tracking results, leading to CPI forecast errors.
• Changes in energy prices may cause sequential and year-on-year PPI trends to deviate from forecasts.
• There remains uncertainty over whether overseas services demand can continue, and weaker external demand may further drag on orders.
• Actual released inflation data and subsequent official sentiment indicators may be inconsistent with the report's forecasts.

What to watch

• The actual July official CPI and PPI readings and their differences from Goldman Sachs forecasts and market consensus expectations.
• Whether subsequent RatingDog and National Bureau of Statistics services PMI readings can return to a clearly expansionary range.
• Whether the new business, employment, and outstanding business indices continue to approach 50 or fall below 50.
• Whether the divergence between domestic demand and new export orders widens.
• The impact of changes in pork, energy, and services prices on food, non-food, and industrial goods inflation.
• Whether slowing growth and inflation drive further fiscal, monetary, or consumption support policies.