In July 2025, China’s S&P Services PMI reached 52.6, its highest since May 2024. This number surpassed forecasts of 50.2 and was up from the previous reading of 50.6. The Composite PMI, which combines services and manufacturing, was at 50.8, down slightly from 51.3. The increase in services was driven by stronger domestic demand and a rise in new export orders, particularly from tourism and improved trade conditions. **The Split in China’s Economy** This data contrasts with the official PMI, which remained flat at 50.0 and relates to larger state-owned companies. The S&P survey focuses on smaller, export-oriented firms, especially in coastal areas. The boost in services led to faster hiring, marking the quickest employment growth since July 2024. However, businesses faced rising input costs due to higher raw materials, fuel, and wages, pushing them to raise selling prices after a six-month pause. The report highlighted improved business confidence, partly due to the U.S.-China agreement to extend their 90-day tariff truce after trade talks in Stockholm. Earlier in July 2025, China’s official Manufacturing PMI was 49.3, below the expected 49.7, while the Caixin Manufacturing PMI was 49.5, compared to an expected 50.3 and a prior 50.4. As of August 5, 2025, the data shows a clear gap in China’s economy. The strong services PMI indicates that consumer sectors are recovering well, while the manufacturing PMIs indicate a decline. This divide suggests trading strategies that can capitalize on these opposing trends. Derivative traders might consider taking long positions in China’s consumer and tech sectors while shorting industrial and basic materials companies. The Hang Seng Tech Index has already outperformed the broader Shanghai Composite by nearly 4% over the past month, indicating a shift in sentiment. A pair trade using call options on a consumer ETF and put options on an industrial ETF could take advantage of this performance gap. **Trading and Volatility** The decline in both official and Caixin manufacturing PMIs points to weaker demand for industrial commodities. This is reflected in falling copper prices, which hit a six-month low of around $8,200 per tonne on the London Metal Exchange last week. Given this trend, buying put options on copper or shorting futures contracts may be wise. The stability of the yuan, bolstered by strong daily fixings from the People’s Bank of China around the 7.28 level, presents another opportunity. The implied volatility on USD/CNH options has decreased to its lowest point since the Stockholm talks, indicating market expectations of stability. Selling option strangles on this currency could be profitable if we believe the central bank will keep the yuan within a narrow range to maintain confidence. Finally, the 90-day tariff truce with the U.S. remains a source of risk. Although business confidence is currently up, we must remember the market volatility seen during the 2018-2019 trade disputes. With the VIX for emerging markets near its yearly lows, purchasing inexpensive, out-of-the-money put options on broad China indices like the FXI could be a valuable hedge against sudden changes in trade relations. Create your live VT Markets account and start trading now.

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