Time has run out for some US trade partners looking to make deals ahead of President Trump’s July 9 deadline for tariffs to snap back to higher levels.

Letters will start going out to countries on Friday to notify them of the tariff rates they will face on exports to the US, Trump told reporters, to go into effect on Aug. 1. The first 10 or 12 letters sent out will be followed by similar batches.

“By the ninth they’ll be fully covered,” Trump said in reference to the deadline, per Bloomberg. “They’ll range in value from maybe 60% or 70% tariffs to 10% and 20% tariffs.”

The Trump team has so far been focused on hammering out trade deals, though it has succeeded in nailing only three pacts so far.

Treasury Secretary Scott Bessent has said around 100 partners would likely see a minimum “reciprocal” rate of 10% come next week, adding that he expects a “flurry” of deals to materialize before the deadline.

Here is where things stand with various partners:

China : The US has eased export restrictions on China for chip design software and ethane, a sign that trade tensions are calming between the two countries after they agreed in May to a framework to move toward a larger trade deal. Software firms like Synopsys (SNPS) and Cadence (CDNS) said they will now sell their chip design tools to Chinese customers again. The US also removed limits on ethane exports to China that it had set just weeks ago.

Vietnam: Trump on Wednesday said he had reached a trade deal with Vietnam, one that will see the country’s imports face a 20% tariff — lower than the 46% he had threatened in April. He also said Vietnamese goods would face a higher 40% tariff “on any transshipping” — when goods shipped from Vietnam originate from another country, like China. Many US goods will see no duty upon import to Vietnam.

Japan: Trump earlier this week said negotiations with Japan had soured, saying he would force Japan to accept higher tariffs of “30%, 35%, or whatever the number is that we determine.” Notably, that proposal is higher than the 24% “Liberation Day” level. “They’re very tough. You have to understand, they’re very spoiled,” he said.

As the July 9 deadline for U.S. reciprocal tariffs looms, markets are bracing for heightened volatility. President Trump’s “America First” trade strategy—marked by unilateral tariff threats and bilateral deal-making—has injected uncertainty into global trade flows, rattling investor confidence and currency valuations. With tariffs ranging from 10% to 35% for countries like Japan and Vietnam, and sector-specific measures targeting autos, semiconductors, and energy goods, the path forward is fraught with risks. This article examines how tariff pressures are reshaping market sentiment, currency dynamics, and investment opportunities.

The Tariff Threat: A Catalyst for Market Volatility

The 90-day tariff pause, now expiring, has been a double-edged sword. While it spurred frantic deal-making—such as Vietnam’s agreement to a 20% import tariff—the looming threat of higher rates (e.g., Japan’s auto tariffs rising to 30-35%) has kept equity futures under pressure. .

Automotive stocks, particularly those exposed to U.S.-Japan trade tensions, have been hit hardest. Toyota Motor (TM) and Honda (HMC) have seen their U.S. equity prices decline by 8-12% since March, reflecting fears of retaliatory tariffs and supply chain disruptions. Meanwhile, the broader industrial sector, including logistics and manufacturing firms, has lagged the S&P 500 by 5% year-to-date.

Currency: The Dollar’s Fragility in a Trade-War World

The U.S. dollar has weakened by 4% against major currencies since the start of 2025, a trend exacerbated by tariff-driven trade imbalances and retaliatory measures. Countries like the EU, facing potential 50% tariffs, are accelerating diversification of trade partners, reducing reliance on dollar-denominated settlements. The euro has gained 3% against the dollar this year, while emerging-market currencies—such as the Vietnamese dong—have stabilized as Hanoi finalizes its tariff deal.

A weaker dollar amplifies risks for dollar-heavy investors. Overseas profits for U.S. multinationals (e.g., Coca-Cola (KO), Boeing (BA)) become less valuable when repatriated, while import-dependent sectors face higher input costs. Conversely, dollar weakness creates opportunities for currency hedging strategies, such as short positions in USD ETFs (e.g., UDN) or long positions in inverse USD futures.

Sectoral Winners and Losers: Where to Invest Amid Tariffs?

The tariff landscape favors defensive and domestically focused sectors while penalizing trade-exposed industries.

Tech and Semiconductors: The U.S.-China trade framework, which eased restrictions on chip design software, has bolstered semiconductor stocks. The Philadelphia Semiconductor Index (SOX) has risen 15% since January, outperforming broader markets. Investors might consider sector ETFs like SMH or names like Intel (INTC), which benefit from reduced cross-border friction. Energy and Commodities: Eased U.S. export controls on ethane and other petrochemicals have boosted North American energy companies. ExxonMobil (XOM) and Chevron (CVX) could gain further if trade normalization with China accelerates. Domestic Consumer Staples: Defensive sectors like healthcare (Johnson & Johnson (JNJ)) and consumer goods (Procter & Gamble (PG)) offer insulation from trade volatility. Their steady cash flows and pricing power make them attractive during uncertainty. Currency-Hedged Equity ETFs: Investors in foreign markets should prioritize ETFs with built-in currency hedging, such as HEDJ (WisdomTree Dynamic Currency Hedged Equity Fund), which tracks global equities while mitigating exchange-rate risks.

Hedging Strategies for the Tariff-Driven Market

Short Volatility Plays: In a high-volatility environment, inverse volatility ETFs like XIV (VelocityShares Inverse VIX Short-Term ETN) could profit as the CBOE Volatility Index (VIX) rises. However, these products carry significant risk and should be used cautiously. Sector Rotation: Rotate out of trade-sensitive sectors (autos, industrials) into defensive and domestic-facing industries. The iShares U.S. Healthcare ETF (IYH) or Vanguard Consumer Staples ETF (VDC) could be suitable picks. Currency Hedges: For portfolios with foreign exposure, use futures contracts or options to hedge against dollar declines. For example, a long position in EUR/USD futures could offset losses if the euro strengthens.

Conclusion: A Delicate Balance Between Deal-Making and Disarray

While tariff deadlines create short-term uncertainty, the ultimate outcome hinges on whether bilateral deals can be finalized before July 9. Investors should remain agile, focusing on sectors insulated from trade friction and hedging currency risks. The path of least resistance for markets lies in a reduction of tariff threats—a scenario that could stabilize the dollar and lift equity futures. Until then, diversification and hedging remain critical tools for navigating this volatile landscape.

India’s Semiconductor Sector: Tracking Government Support and Investment Trends

On May 15, 2025, India approved its sixth semiconductor manufacturing facility, a joint venture between HCL and Foxconn, as part of the India Semiconductor Mission. According to the central government, five additional semiconductor units are already in advanced stages of construction.

As part of its broader strategy to strengthen domestic chip production, India is actively seeking foreign investments to support the development and design of semiconductor fabs, ATMP units, and related infrastructure.

We look at the latest developments impacting India’s semiconductor ambitions.

India eyes 2D materials as the next big leap in semiconductor technology

India is actively exploring the potential of two-dimensional (2D) materials as a transformative leap in semiconductor innovation, according to a news report published by CNBC TV18 on June 30, 2025. The news report, citing a senior central government official, states that 2D materials are being recognized internationally as a critical frontier in semiconductor technology, and India is keen to position itself early in this emerging field

In contrast to the present 3nm chips produced by major players like Apple, Samsung, MediaTek, and Intel, chips built using 2D materials could surpass current size and performance limitations. The 2D materials—comprising layers just a few atoms thick—could enable the development of much smaller, faster, and more energy-efficient chips. Materials such as graphene, phosphorene, and transition metal dichalcogenides (TMDs) are at the forefront of global research in this domain.

At present, no country or company has achieved commercial-scale production of 2D material-based chips. Nonetheless, research efforts are underway in countries like the US, China, the UK, Germany, and Japan. India is now looking to become an early entrant in this high-potential space.

Reports indicate that India is preparing to issue a call for Expressions of Interest (EoIs) from both academic institutions and private industry. The objective is to facilitate the establishment of research and development hubs and pilot fabrication units dedicated to 2D materials.

This initiative is part of India’s broader ambition to become a global semiconductor innovation and manufacturing hub. The push toward 2D materials acknowledges that long-term competitiveness may depend on technologies that extend beyond today’s fabrication capabilities.

Latest updates

The central government has given approval to Micron Semiconductor for establishing a Special Economic Zone (SEZ) in Sanand, Gujarat. This SEZ, covering an area of 37.64 hectares, will be developed with an estimated investment of INR 130 billion (US$1.51 billion). The approval was formalized by the Ministry of Commerce through a gazette notification dated June 23, 2025. The ministry has also designated the SEZ as an Inland Container Depot under Section 7 of the Customs Act, 1962. This initiative is part of India’s broader strategy to attract high-value, capital-intensive investments in the semiconductor and electronics manufacturing sectors.

India is set to launch its first domestically produced semiconductor chip by the end of 2025, using 28 to 90 nanometre technology, according to Union Minister for Electronics and IT, Ashwini Vaishnaw. As of May 2025, six chip fabrication units are under development, marking a major step forward in the country’s semiconductor mission, which was initiated in 2022. The initiative targets a critical segment that comprises around 60 percent of global semiconductor demand, focusing on applications in the automotive, telecom, power, and railway sectors. Vaishnaw also stressed the need to complement manufacturing with the growth of indigenous intellectual property, chip design, and technical standards to strengthen India’s position in the semiconductor global value chain.

On May 14, 2025, India’s Union Cabinet approved the establishment of an additional semiconductor manufacturing facility. This newly sanctioned plant is a joint venture between HCL and Foxconn, set to be located near Uttar Pradesh’s Jewar Airport within the Yamuna Expressway Industrial Development Authority (YEIDA) region. As outlined in the official announcement, the facility will produce display driver chips for mobile phones, laptops, automotive systems, PCs, and a wide range of other display-equipped devices. The plant will have a design capacity of 20,000 wafers per month. This latest unit has an INR 37 billion investment (US$433.6 million). Key ecosystem partners, including major equipment manufacturers like Applied Materials and Lam Research, and essential gas and chemical suppliers like Merck, Linde, Air Liquide, and Inox.

As per a report published by Money Control, Renesas Electronics, a Japanese semiconductor manufacturer, is on track to complete its pilot Outsourced Semiconductor Assembly and Test (OSAT) facility in India by July 2025. This facility has been developed in collaboration with India’s Murugappa Group’s CG Power and Thailand’s Stars Microelectronics. It is expected to produce its first batch of chips by mid-2026. The main OSAT production plant, located in Sanand, Gujarat, is scheduled for completion by December 2026, with full-scale production expected to commence by October 2027. The facility is established with a US$222 million investment.

According to a news report published by the The Edge Malaysia, Liew Chin Tong, Deputy Minister of Investment, Trade and Industry, Malaysia, on his visit to India on March 18, 2025, spoke on the country’s intention to be part of “India’s semiconductor story.” Liew pointed to India’s expertise in semiconductor equipment, assembly, and testing as key areas of collaboration. With domestic semiconductor market expected to triple from US$38 billion in 2023 to US$109 billion by 2030-Malaysia sees potential for deeper cooperation with India for the component manufacturing. Liew noted that several companies currently investing in India have long-standing operations in Malaysia, creating prospects for trilateral business partnerships and supply chain integration.

The Yamuna Expressway Industrial Development Authority (YEIDA) has provided a new 48-acre land parcel for a semiconductor project. As per a Hindustan Times report on March 9, 2025, the newly designated land, located in Noida Sector 28, Uttar Pradesh, has been assigned to Vama Sundari Investments—a joint venture between the HCL Group and Foxconn. This location features critical infrastructure, along with presence of the Medical Device Park and other operational industries. The original land allotment was in Noida Sector 10. However, on March 6, 2025, YEIDA issued a revised letter of intent to Vama Sundari, officially offering the alternative plot in Noida Sector 28. The company plans to invest INR 37.06 billion (US$425 million) in setting up an outsourced semiconductor assembly and test (OSAT) facility and is expected to create approximately 4,000 jobs.

According to various news reports published on March 5, 2025, India Semiconductor Mission (ISM), a central government body, has signed a fiscal support agreement with Tata Electronics and Tata Semiconductor Manufacturing for establishing a semiconductor facility in Dholera, Gujarat. Tata Electronics will invest over INR 910 billion (US$10.44 billion) to establish a semiconductor fabrication plant in Dholera’s Special Investment Regions (SIR) with a production capacity of 50,000 wafers per month. The central government, through ISM, will provide 50 percent financial support for eligible project costs. The project, approved by the union cabinet in February 2024, is expected to create over 20,000 direct and indirect skilled jobs within the country. Tata has partnered with Taiwan’s Powerchip Semiconductor Manufacturing Corporation for the plant, which will cater to global markets in automotive, computing, communications, and AI sectors.

Per a Business Standard report on October 2, 2024, iPhone contract manufacturer Foxconn will invest up to INR 4.24 billion in its yet-to-be-named semiconductor joint venture (JV) with HCL for an OSAT plant in India. According to an official company note: “If the potential investment of no more than US$13,310,000 (approx. INR 1.12 billion) is included, the total accumulated holding will not exceed US$50,510,000 (approx. INR 4.24 billion) and the cumulative shareholding ratio will be adjusted based on the actual capital increase.”

Prior to this, Foxconn had invested about INR 2.46 billion in the JV via its subsidiary Big Innovation Holdings and further increased it to INR 3.12 billion through Foxconn Hon Hai Technology India Mega Development Private Limited. Foxconn has a 40 percent stake in its JV with HCL.

Tata Electronics and PSMC have completed the technology transfer pact for fab unit in Gujarat. The Economic Times is reporting – as of September 27 – that Tata Electronics has reached a definitive agreement with the Taiwanese foundry for the design and construction support to build India’s inaugral AI-enabled greenfield semiconductor fabrication plant. Further, in order to ensure the effective transfer of technology to Tata’s fab unit, PSMC will license a broad portfolio of technologies, alongside providing engineering support. Tata’s Gujarat fab is set to manufacture chips for applications like power management IC, display drivers, microcontrollers (MCU), and high-performance computing logic. These chips will target demand in AI, automotive, computing, data storage, and wireless communication markets.

Per reporting in the Indian Express, as of September 9, 2024, there are 12 India startup firms receiving financial assistance under the DLI Scheme out of 59 applicants. Also, 21 applications are currently under review. For more details, read our article: India’s Emerging Semiconductor Ecosystem: Key Players

The Indian government will launch the next phase of the India Semiconductor Mission within six months, said Electronics and Information Technology Minister Ashwini Vaishnaw on September 17. Besides enhanced funding scope, the focus of the next phase will be developing new semiconductor hubs, such as in Greater Noida, Uttar Pradesh.

Tata Electronics is expanding its semiconductor manufacturing capabilities with two additional fabrication plants (fabs) in Dholera, Gujarat. The first fab, in partnership with Taiwan’s PSMC, is currently under construction, and will manufacture chips for sectors like automotive, AI, and wireless communication. It is expected to begin production in 2026, producing up to 50,000 wafers per month.

Plans for the new – second and third fabs – to be built in the next five to seven years, are still evolving, with future partnerships and technology choices depending on market conditions.

Plans for the new – second and third fabs – to be built in the next five to seven years, are still evolving, with future partnerships and technology choices depending on market conditions. A recently proposed US$10-billion joint semiconductor fab proposal by Israel’s Tower Semiconductor and India’s Adani Group is currently under review as part of the India Semiconductor Mission (ISM). ISM CEO Akash Tripathi announced during a press conference on September 9 that the Ministry of Electronics and Information Technology (MeitY) has requested additional details from the entities involved in the project. While under consideration by MeitY, the previous week, the Maharashtra cabinet approved the establishment of a semiconductor fab unit in Panvel, near Mumbai, through a joint venture between the Adani Group and Tower Semiconductor.

Larsen & Toubro Ltd. has announced its plan to invest over US$300 million to establish a fabless chip company in India, aiming to design 15 products by 2027. This move aligns with India’s push to reduce semiconductor imports and build local capacity amid global supply chain shifts. According to media reports, the company seeks the central government’s support for chip design incentives but won’t seek external funding. India’s US$10 billion semiconductor initiative, first approved in 2021, has attracted major investments.

On September 9, 2024, it was reported that India’s Tata Electronics has signed an MoU with Tokyo Electron (TEL) to purchase equipment and services for its semiconductor facilities in Gujarat and Assam. The partnership will focus on workforce training, R&D, and enhancing semiconductor infrastructure. Tata Electronics is investing INR 910 billion (US$10.84 billion) in its Gujarat Fab and INR 270 billion (US$3.21 billion) in its Assam assembly and testing unit. The facilities will produce chips for sectors like automotive, mobile devices, and AI. TEL aims to leverage India’s talent for engineering services to support its global product development, accelerating innovation and development across multiple technologies.

In September 2024, the US state department announced that the country will partner with India’s Semiconductor Mission to explore opportunities for strengthening the global semiconductor supply chain under the ITSI Fund, part of the CHIPS Act of 2022 . Through this collaboration, a comprehensive assessment of India’s semiconductor infrastructure and regulatory framework will be conducted, involving stakeholders like state governments and educational institutions. The insights will guide future joint initiatives to boost this critical sector.

As of September 5, India and Singapore have signed multiple agreements during Prime Minister Narendra Modi’s visit to the country, including in the areas of semiconductor cluster development and the cultivation of talent in semiconductor design and manufacturing.

Per a government press (PIB) update: The construction of the four previously approved semiconductor units is advancing rapidly, contributing to the development of a strong semiconductor ecosystem around them. These units will attract nearly INR 1.5 trillion (US$18.15 billion) in investment and will have a combined production capacity of approximately 70 million chips per day. (The four projects are a Tata-PSMC commercial fab plant and three ATMP/OSAT plants.)

Scheme Applicant Total Project Cost (INR Billion) Eligible Project Cost (INR Billion) Incentive Approved (INR Billion) Modified scheme for setting up of semicon fabs in India TEPL (commercial fab) 915.26 679.56 339.78 Modified scheme for setting up of compound semicon/silicon photonics/sensors fab and semicon/ATMP/OSAT facilities in India Micron Technology Inc. (ATMP) 225.16 225.16 112.58 TEPL (OSAT) 271.20 204.49 102.25 CG Power & Industrial Solutions Ltd. (ATMP) 75.84 70.02 35.01 Total 1487.46 1179.23 589.62 (Source: Indian Express using Government of India’s internal documents)

Semiconductor schemes in India

Modifications to the Program for Development of Semiconductors and Display Manufacturing Ecosystem in India

On September 21, 2022, the Cabinet, chaired by Prime Minister Narendra Modi, approved key modifications to the Program for Development of Semiconductors and Display Manufacturing Ecosystem in India:

Fiscal support of 50 percent of project cost on pari-passu basis for all technology nodes under Scheme for Setting up of Semiconductor Fabs in India. Fiscal support of 50 percent of project cost on pari-passu basis under Scheme for Setting up of Display Fabs. Fiscal support of 50 percent of capital expenditure on pari-passu basis under Scheme for Setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab and Semiconductor ATMP /OSAT Facilities in India. Additionally, target technologies under the Scheme will include discrete semiconductor fabs.

Under the modified program, a uniform fiscal support of 50 percent of project cost shall be provided across all technology nodes for setting up of semiconductor fabs. Given the niche technology and nature of compound semiconductors and advanced packaging, the modified program shall also provide fiscal support of 50 percent of capital expenditure in pari-passu mode for setting up of compound semiconductors/silicon photonics/sensors / discrete semiconductors fabs and ATMP/OSAT.

This article was originally published on April 6, 2021. It was last updated July 3, 2025.

The July 9, 2025, implementation of a 20% tariff on most Vietnamese imports to the U.S.—doubling the current 10% rate—marks a pivotal shift in trade dynamics with profound implications for consumer goods sectors. This escalation, layered with a 40% levy on transshipped goods of Chinese origin, is already prompting strategic repositioning in investment portfolios. For investors, the urgency is twofold: first, to quantify the risks to sectors like apparel, footwear, and electronics; and second, to identify opportunities in companies insulated from tariff-driven cost pressures.

Sector-Specific Vulnerabilities: Apparel, Footwear, and Electronics

The tariff hike targets Vietnam’s export pillars. In Q1 2025 alone, Vietnam shipped $3.78 billion in textiles and garments, $1.97 billion in footwear, and $2.74 billion in electronics to the U.S.—sectors now facing immediate cost inflation.

Apparel & Footwear:

Nike, which sources nearly 50% of its footwear from Vietnam, stands out as a case in point. A 20% tariff on its imports could add $1.5 billion to its annual costs, forcing price hikes or margin compression. Similarly, VF Corp (owner of Vans and The North Face) and Adidas—reliant on Vietnamese manufacturing—face similar pressures.

The stock’s volatility since early 2024 hints at market skepticism about its ability to navigate rising costs.

Electronics:

The sector’s complexity amplifies risks. Apple, Samsung, and HP source critical components from Vietnam, where assembly lines often finalize Chinese-made parts. The 40% tariff on transshipped goods adds uncertainty, as enforcement hinges on ambiguous “substantial transformation” rules.

Any disruption here could delay product launches or force costlier supply chain reconfigurations.

The JPMorganChase Institute’s $82.3B Warning: Inflation and Margin Squeeze Ahead

The JPMorganChase Institute estimates that midsize U.S. firms face $82.3 billion in added import costs under current tariff policies—equivalent to $2,080 per employee or 3.1% of average payroll. For consumer-facing sectors, this translates to price hikes.

Direct Inflation : J.P. Morgan forecasts tariffs could raise Personal Consumption Expenditures (PCE) by 1–1.5% in 2025. Goldman Sachs suggests companies may pass 60% of tariff costs to consumers, while the Atlanta Fed estimates a 50% pass-through rate.

: J.P. Morgan forecasts tariffs could raise Personal Consumption Expenditures (PCE) by 1–1.5% in 2025. Goldman Sachs suggests companies may pass 60% of tariff costs to consumers, while the Atlanta Fed estimates a 50% pass-through rate. Margin Pressure: Low-margin retailers like Walmart or Target—reliant on low-cost Vietnamese imports—face a stark choice: absorb costs (hurting margins) or raise prices (risking customer attrition).

Strategic Investment Shifts: Pivot to Domestic Producers and Diversified Supply Chains

Investors should act swiftly to reposition ahead of July 9, focusing on three themes:

U.S. Domestic Manufacturers:

Companies with onshore production or minimal reliance on Vietnamese imports stand to gain. For example: Textiles: U.S.-based firms like VF Corp’s domestic divisions or smaller regional producers. Footwear: Brands like Skechers, which sources 40% of footwear from China and Mexico, may face less disruption. Supply Chain Diversifiers:

Companies with agility to shift sourcing to Malaysia, Thailand, or Mexico could mitigate tariffs. Look for firms with: Transparent supply chain disclosures (e.g., HP’s quarterly reports on regional sourcing). Geographic flexibility (e.g., Samsung’s manufacturing hubs in Southeast Asia). Transshipment Winners:

The 40% tariff on Chinese-origin goods via Vietnam creates incentives to source directly from countries with trade agreements. U.S. exporters to Vietnam—like Tyson Foods (agriculture) and Deere (heavy machinery)—benefit from zero-tariff access under the new deal.

Deere’s Vietnam sales have surged 17% annually since 2023, signaling early gains from tariff carve-outs.

The Legal and Negotiation Wildcard

While the tariffs are set to take effect, legal challenges linger. Federal courts have ruled parts of the IEEPA-based tariff authority unconstitutional, pending appeals. Investors should monitor negotiations between U.S. and Vietnamese officials, as a last-minute agreement could reduce the 20% rate or clarify transshipment rules.

Conclusion: Act Before the Crossroads

The July 9 deadline is a critical inflection point. Investors must balance immediate risks—such as rising consumer goods prices and margin pressures—with long-term opportunities in diversified supply chains and trade-advantaged sectors. Portfolios should shed Vietnam-focused ETFs (e.g., VNM) and retailers overly reliant on low-cost imports while favoring U.S. producers and regional manufacturing hubs. The path forward demands agility, data-driven decisions, and a focus on companies that can thrive in a tariff-constrained world.

This analysis underscores the need to act decisively before July 9. The coming months will test the resilience of consumer goods sectors—and the ingenuity of investors.

The Caixin China General Services PMI, a key indicator of economic activity in the services sector, dipped to 51.1 in May 2025—a 9-month low—marking slower growth despite remaining in expansionary territory (above 50). This moderation, against a backdrop of manufacturing contraction and U.S. tariff pressures, underscores the sector’s vulnerability to external shocks. Yet, within this slowdown lie pockets of resilience. Sectors like consumer discretionary, technology, and infrastructure are positioning themselves to outperform through innovation, cost efficiency, and policy support. Investors should focus on these areas to capitalize on China’s evolving economic landscape.

External Pressures: Manufacturing Drag and U.S. Tariff Challenges

China’s manufacturing sector has been in contraction for most of 2024 and 2025, with the Caixin Manufacturing PMI falling to 48.3 in May 2025—the steepest decline since September 2022. This contraction, driven by rising U.S. tariffs and weakening global demand, has spilled into the services sector. Foreign demand for services, such as logistics and tourism, contracted for the first time since December 2024 in May 2025, exacerbating sector-wide pressures.

Policy Responses: A Lifeline for Services?

Beijing has responded aggressively to the slowdown, lowering the reserve requirement ratio (RRR) and policy rates to boost liquidity. These measures aim to support businesses and stimulate domestic demand. The services sector, which accounts for nearly 25% of China’s GDP, has benefited from targeted stimulus, such as subsidies for tech infrastructure and consumer spending incentives. However, input costs for services—driven by energy and material prices—rose at a seven-month high in May 2025, threatening profit margins unless firms adapt.

Sector-Specific Resilience: Where to Invest

Consumer Discretionary: Domestic Demand as a Safety Net

Domestic consumption remains a bright spot. Firms in e-commerce, entertainment, and healthcare services have shown resilience by pivoting to local demand. For example, Alibaba’s e-commerce platforms (BABA) have leveraged China’s urbanization push, while healthtech companies like Ping An Good Doctor (1833.HK) are benefiting from rising healthcare spending.

Technology: Innovation as a Growth Engine

The tech sector is a key beneficiary of policy support. Companies in AI, cloud computing, and renewable energy infrastructure—such as Tencent Cloud (TCEHY) and Envision Energy—are capitalizing on subsidies for green tech and digital transformation. These firms are also diversifying supply chains to mitigate U.S. tariff risks, a strategic move that could pay dividends. Infrastructure: Government Backing and Long-Term Gains

Beijing’s push to modernize infrastructure—5G networks, smart cities, and high-speed rail—has created opportunities in construction and engineering. Companies like China Railway Construction (1800.HK) and State Grid Corporation, though state-backed, offer steady returns tied to fiscal stimulus.

Strategic Investment Themes

Domestic Demand Plays : Prioritize firms with strong exposure to urban consumption and healthcare.

: Prioritize firms with strong exposure to urban consumption and healthcare. Tech Innovation : Look for companies investing in AI, cloud infrastructure, and green tech.

: Look for companies investing in AI, cloud infrastructure, and green tech. Supply Chain Diversification: Favor firms reducing reliance on U.S. markets through Southeast Asia or European partnerships.

Risks and Considerations

While the services sector’s resilience is evident, headwinds persist. Input cost inflation, geopolitical tensions, and a weak job market could dampen recovery. Investors should avoid overexposure to sectors heavily reliant on external demand, such as export-driven logistics.

Conclusion: Selective Opportunities Amid the Slowdown

China’s services sector is navigating a challenging environment, but its adaptability and policy tailwinds create selective opportunities. Investors should focus on firms that leverage domestic demand, innovation, and supply chain flexibility. The May 2025 PMI dip is a reminder of the sector’s fragility, but history shows that resilience often emerges from adversity. For now, the playbook is clear: pick winners in tech, healthcare, and infrastructure, and avoid bets on global demand.

As the saying goes, “In China, the tide may go out, but the ocean never sleeps.” The question is whether investors can spot the boats that stay afloat.