China’s Services Sector Expansion: A Strategic Catalyst for Risk-On Sentiment and Commodity-Linked Currencies

China’s services sector has emerged as a pivotal driver of economic resilience in 2025, with the Caixin China General Services PMI surging to 52.6 in July 2025—the fastest expansion since May 2024—and edging up to 52.5 in August, reflecting sustained momentum [1]. This growth, fueled by robust foreign demand, a rebound in tourism, and stable trade conditions, has significant implications for global risk-on sentiment and commodity-linked currencies like the Australian Dollar (AUD).

Services Sector as a Risk-On Catalyst

The services sector accounts for approximately 61% of China’s GDP, making its performance a critical barometer for global markets [3]. The recent uptick in the PMI signals a shift toward service-driven growth, which contrasts with the ongoing challenges in manufacturing and real estate. Stronger services activity has bolstered business confidence, with sentiment reaching a five-month high in August 2025 [1]. This optimism has spilled over into emerging markets, where investors are increasingly allocating capital to economies with exposure to China’s services-driven recovery.

For instance, the Caixin Services PMI’s jump to 52.6 in July 2025—a 2.0-point increase from June—spurred a 0.12% rise in AUD/USD, underscoring the currency’s sensitivity to Chinese economic data [3]. The AUD, often viewed as a proxy for Chinese demand, has historically reacted to shifts in the services sector, even as manufacturing PMI readings remain below the 50 contraction threshold [2]. This divergence highlights the growing importance of services in shaping trade dynamics and investor sentiment.

Commodity Demand and Structural Challenges

While the services sector’s expansion supports broader economic stability, its direct impact on commodity demand—particularly for iron ore—remains muted. Iron ore prices have fluctuated in 2025, with a 4% rally in mid-July driven by infrastructure stimulus and seasonal steel demand [4], but subsequent declines due to weak manufacturing activity and property-sector woes [2]. The structural decline in Chinese steel demand, exacerbated by urbanization saturation and policy shifts toward services, is expected to weigh on iron ore prices long-term [5].

This dichotomy between services and industrial sectors creates a nuanced outlook for the AUD. While a strong services PMI can boost risk appetite and support the AUD, persistent weakness in manufacturing and steel consumption introduces volatility. For example, China’s official manufacturing PMI fell to 49.4 in August 2025, signaling continued contraction and dampening demand for Australia’s commodity exports [6].

Strategic Implications for Investors

Investors should consider the interplay between China’s services-driven recovery and structural headwinds in industrial sectors. A resilient services sector can act as a buffer for emerging markets, encouraging capital flows to risk-on assets and commodity-linked currencies. However, the AUD’s performance will likely remain contingent on broader economic trends, including property-sector reforms and global trade dynamics.

For those positioning for risk-on environments, a diversified approach that balances exposure to China’s services sector with hedging against industrial sector risks may prove advantageous. The Caixin Services PMI’s trajectory will remain a key indicator to monitor, as it offers insights into the sustainability of China’s economic rebalancing and its ripple effects on global markets.

Source:
[1] China RatingDog Services PMI, [https://tradingeconomics.com/china/services-pmi]
[2] Australian Dollar edges lower despite diminishing, [https://www.fxstreet.com/news/australian-dollar-remains-subdued-following-chinas-manufacturing-pmi-202509010231]
[3] When is China's Caixin Services PMI, and how could it..., [https://www.mitrade.com/insights/news/live-news/article-1-1090068-20250903]
[4] Iron Ore Prices Surge 4%: Chinese Demand Fuels Rally, [https://discoveryalert.com.au/news/iron-ore-price-rally-impact-2025/]
[5] China's Steel Demand Slowdown: Impact on Australian..., [https://discoveryalert.com.au/news/china-australia-economy-iron-ore-2025/]
[6] China's NBS Manufacturing PMI rises to 49.4 in August..., [https://www.mitrade.com/au/insights/news/live-news/article-6-1083209-20250901]