In July 2025, China’s S&P Services PMI reached 52.6, the highest since May 2024, surpassing expectations of 50.2, with a prior reading of 50.6. The Composite PMI, intertwining manufacturing, recorded at 50.8, slightly declining from the previous 51.3. This improvement in services was due to stronger domestic demand and increased new export orders, especially from tourism and stabilised trade conditions.
The Split in China’s Economy
The data differs from the official PMI, stagnating at 50.0, representing larger state-owned enterprises, while the S&P survey reflects smaller, export-focused companies, notably in coastal regions. Enhanced activity in services boosted quicker hiring rates, marking the fastest employment growth since July 2024. However, input cost pressures persisted due to increases in raw materials, fuel, and wages, leading firms to raise selling prices after six months.
The report also pointed out an uptick in business confidence, partially attributed to the U.S.-China agreement to extend their 90-day tariff truce following trade discussions in Stockholm. Earlier in July 2025, China’s official Manufacturing PMI stood at 49.3, lower than the 49.7 expected, and the China Caixin Manufacturing PMI was 49.5, compared to the expected 50.3 and a prior of 50.4.
Given the data from today, August 5th, 2025, we see a clear split in China’s economy. The strong services PMI, the highest since May 2024, suggests consumer-facing sectors are recovering well, but this is sharply contrasted by contracting manufacturing PMIs. This divergence points towards trading strategies that can isolate these two opposing trends.
Derivative traders should consider long positions on China’s consumer and tech sectors, while simultaneously taking short positions on industrial and basic materials companies. We have already seen the Hang Seng Tech Index outperform the broader Shanghai Composite by nearly 4% over the last month, reflecting this shift in sentiment. Using options, a pair trade involving call options on a consumer ETF and put options on an industrial ETF could capture this widening performance gap.
Trading and Volatility
The weakness in both official and Caixin manufacturing PMIs signals reduced demand for industrial commodities. Copper prices have already reflected this, falling to a six-month low of around $8,200 per tonne on the London Metal Exchange last week. This is reminiscent of the slowdown we saw in late 2024, so buying put options on copper or shorting futures contracts seems like a logical response to these figures.
The stability in the yuan, supported by the People’s Bank of China’s recent strong daily fixings around the 7.28 level, presents another opportunity. Implied volatility on USD/CNH options has fallen to its lowest point since the Stockholm talks, suggesting the market expects stability. Selling option strangles on the currency could be profitable if we believe the central bank will keep the yuan within a tight range to support confidence.
Finally, the 90-day tariff truce with the U.S. remains a source of underlying risk. While business confidence is up for now, we should remember the sharp market volatility during the 2018-2019 trade disputes. With the VIX for emerging markets currently trading near its lows for the year, buying cheap, out-of-the-money put options on broad China indices like the FXI could serve as a valuable hedge against any sudden breakdown in trade relations.
