The Caixin/Markit services purchasing managers’ index (PMI) dropped to 51.5 in July from 51.6 in June.
While the drop was marginal, the reading matched the level in April which was the lowest since May 2016.
New business continued to expand at a decent clip but at a slightly slower pace. The rate of growth in new work eased to a 16-month low.
Employment in the services industry improved slightly as companies continued to add workers, albeit at a slower pace.
China is counting on services, particularly high value-added services in finance and technology, to lessen the economy’s traditional reliance on heavy industry and investment.
The services sector, accounting for just over half of China’s economy in the first half of the year, grew 7.7 percent in the period, easily outpacing overall GDP growth of 6.9 percent.
But growth in the finance and real estate industries slowed to multi-year lows in the second quarter as property transactions in many cities declined amid regulatory efforts to tamp down speculation and rein in risky activities in the financial sector.
The decline in the services sector, taken alongside Caixin’s survey on Tuesday showing an uptick in manufacturing, suggests China continues to rely on heavy industry and government stimulus for economic growth, which benefits mainly large state-owned firms.
Indeed, the gap between Caixin’s service and manufacturing sector readings in July was the smallest its been in three years, according to a Reuters calculation based on historical data.
Caixin’s composite manufacturing and services PMI, also released on Thursday, rose to 51.9 in July from 51.1 in June and was the highest in four months.
“China’s economic performance in July was stronger than expected, mainly due to sustained recovery in the manufacturing sector”, Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, said in a note accompanying the data release.
“However, downward pressure on the economy likely remains as the index gauging companies’ confidence towards the 12-month business outlook dropped in both the manufacturing and services industries.”