China's Divergent Path: Unlocking Resilient Service Sub-Sectors Amid Manufacturing Woes

China's economy is at a crossroads. While its manufacturing sector grapples with structural challenges—slowing growth, deflationary pressures, and a global trade slowdown—the service sector is surging ahead, driven by digital transformation, policy tailwinds, and evolving consumer demand. For investors, this divergence presents a clear opportunity: to pivot capital toward resilient service sub-sectors poised to thrive in 2025 and beyond.

The Manufacturing Conundrum: A Sector in Transition

China's manufacturing sector, long the backbone of its economic ascent, is showing signs of strain. In Q2 2025, the sector contributed 25.68% of GDP, down from 27.04% in Q1 2024. The Purchasing Managers Index (PMI) for manufacturing dipped below 50 in key months like May and June 2025, signaling contraction compared to the prior month. Export growth has also moderated, with manufacturing exports rising just 0.6% year-on-year in May 2025.

Structural issues are compounding these challenges. Rising labor costs, regulatory shifts, and geopolitical tensions are pushing manufacturers to recalibrate. Meanwhile, private sector wages in manufacturing have stagnated or declined, exacerbating labor shortages. These trends highlight a sector in transition, struggling to adapt to a post-pandemic world where global demand is shifting and cost competitiveness is eroding.

The Service Sector's Resilience: A New Engine for Growth

In contrast, the service sector has become a stabilizing force. In Q2 2025, the tertiary sector expanded by 5.7% year-on-year, driven by surging demand in information technology (IT), financial services, and healthcare. This growth masked broader economic headwinds, including a struggling property market and weak consumer spending in other areas.

The government's Foreign Investment Action Plan for 2025 is turbocharging this momentum. By expanding market access for foreign investors in biotech, telecom, education, and healthcare, China is signaling its intent to transform the service sector into a global innovation hub. The revised Negative List for Foreign Investment has already reduced restrictions, while the Catalogue of Encouraged Industries now includes 1,700 items—15% more than in 2023—explicitly inviting capital into high-potential areas.

Strategic Investment Opportunities: Where to Bet in Services

1. Digital Services and Fintech
   The fintech sector alone is projected to grow at a 13.8% CAGR, reaching USD 9.97 trillion by 2030. The rollout of the e-CNY (Digital Currency Electronic Payment) system has created a fertile ground for innovation, with transaction volumes surging in 2025. Foreign firms are entering via partnerships with local giants like Tencent and Ant Group, while regulatory reforms—such as removing ownership caps for securities firms—are easing entry.

Digital infrastructure investments, including green computing and AI-driven logistics, are also gaining traction. The Lingang New Area in Shanghai offers subsidies of up to RMB 10 million for intelligent computing centers, a clear signal of government support.

1. Healthcare and Aging-Related Services
   With China's population set to exceed 400 million elderly by 2035, demand for healthcare, retirement planning, and telemedicine is booming. The Rural Comprehensive Revitalization Plan (2024–2027) is expanding access to rural healthcare, creating opportunities for foreign firms to enter via wholly-owned hospitals and telehealth platforms.

Regulatory changes, such as lifting foreign ownership restrictions in cell and gene therapy in free trade zones, are opening doors for biotech firms. The integration of AI-driven diagnostics and digital health solutions is further accelerating growth, backed by government incentives.

1. Education and Cultural Services
   The government is pushing for "orderly expansion" of education and cultural industries, aligning them with international standards. Foreign universities and cultural enterprises are being invited to collaborate with Chinese partners, creating a pipeline for premium educational offerings and content.

Policy Tailwinds: A Supportive Ecosystem

China's 2025 Foreign Investment Action Plan is a game-changer. By streamlining M&A processes, offering reinvestment incentives, and enhancing transparency, the government is making the service sector more attractive. For instance, foreign equity investment in listed companies is being encouraged through operational guidelines that attract long-term capital. These policies are not just theoretical—they are actionable, with pilot programs already in motion.

The Road Ahead: Strategic Recommendations

For investors, the message is clear: pivot capital toward service sub-sectors with structural tailwinds.
- Digital Services: Invest in firms leveraging e-CNY infrastructure, AI-driven logistics, and fintech platforms.
- Healthcare: Target companies with expertise in telehealth, biotech, and rural healthcare expansion.
- Education and Culture: Prioritize partnerships with institutions offering high-quality, internationally accredited programs.

While risks remain—geopolitical tensions, regulatory shifts, and market saturation in some areas—the scale of government support and consumer demand in services outweigh these challenges. The service sector is not just a buffer for China's economy; it is its future.

In conclusion, the divergent trajectories of China's manufacturing and service sectors present a compelling case for selective investment. As manufacturing's share of GDP declines, the service sector's resilience and innovation-driven growth make it the prime arena for long-term value creation. The time to act is now.