Assessing the Resilience of China's Services Sector Amid Weak Domestic Demand and Geopolitical Uncertainty

China’s services sector has emerged as a critical pillar of economic resilience in 2025, even as the country grapples with weak domestic demand and escalating geopolitical tensions. Despite a 5.5% year-on-year growth in the first half of 2025, the sector faces headwinds from deflationary pressures and uneven consumer spending [1]. However, sub-sectors like digital services, fintech, and transport have demonstrated robust expansion, offering strategic opportunities for global investors navigating a complex landscape.

Key Resilient Sub-Sectors

The services sector’s resilience is anchored in technology-driven industries. Information transmission, software, and IT services surged by 11.1% year-on-year, driven by AI adoption and digital infrastructure investments [2]. Leasing and business services followed closely at 9.6%, reflecting growing demand for corporate support services amid supply chain reconfigurations [2]. Meanwhile, fintech attracted $44.7 billion in global investment in H1 2025, fueled by AI-enabled platforms and digital asset innovation [3]. Transport and logistics also gained momentum, expanding by 6.4% as China’s Belt and Road Initiative (BRI) solidified its grip on global trade routes [4].

Geopolitical Risks and Strategic Adjustments

U.S.-China tensions remain a double-edged sword. While export controls on semiconductors and intellectual property disputes threaten IT and leasing sectors, they also accelerate China’s push for self-reliance under the "Made in China 2025" initiative [5]. The 2025 Foreign Investment Action Plan has partially offset these risks by easing market access for biotech, telecom, and healthcare, with 1,700 encouraged industries and relaxed ownership rules in free trade zones [6]. However, U.S. tariffs and the potential loss of Permanent Normal Trade Relations (PNTR) status have forced companies to adopt risk-mitigation strategies, such as diversifying supply chains to India and Vietnam [7].

Domestic Demand Challenges and Policy Responses

Weak consumer spending and high savings rates persist, with retail sales growing only 5.0% in H1 2025 despite government subsidies for consumer goods [8]. To counter this, Beijing has prioritized fiscal and monetary easing, including loose monetary policy and targeted stimulus for the property and stock markets [9]. The "Dual Circulation" strategy, which emphasizes domestic demand, has also spurred rural revitalization and AI-driven healthcare services, creating niche opportunities for investors [10].

Strategic Investment Positioning

Global investors should adopt a dual-track approach:
1. Sectoral Diversification: Prioritize sub-sectors with policy tailwinds, such as fintech (13.8% CAGR projected) and AI-enabled logistics, while hedging against geopolitical risks by avoiding overexposure to U.S.-sanctioned technologies [11].
2. Regulatory Compliance: Implement stringent data security protocols to navigate China’s Cybersecurity Law and avoid compelled data disclosure risks [12].
3. Local Partnerships: Leverage government incentives for joint ventures in healthcare and education, where international collaboration is encouraged [13].

Conclusion

China’s services sector remains a paradox of resilience and vulnerability. While digital and transport services offer compelling growth trajectories, investors must balance these opportunities against geopolitical volatility and domestic demand constraints. A nuanced strategy that combines policy alignment, sectoral diversification, and risk mitigation will be critical to unlocking value in this dynamic market.

Source:
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[2] China's Economy May 2025: Slow Industrial Output ... [https://www.china-briefing.com/news/chinas-economy-may-2025-cooling-industrial-output-resilient-consumption/]
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[4] Unveiling the global trading risk of China's Belt and Road ... [https://www.thomsonreuters.com/en-us/posts/international-trade-and-supply-chain/global-trading-risk-china-belt-road-initiative/]
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[6] China's Divergent Path: Unlocking Resilient Service Sub ... [https://www.ainvest.com/news/china-divergent-path-unlocking-resilient-service-sectors-manufacturing-woes-2508/]
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