China's services sector continued to grow in July, but the pace of expansion slowed notably. Employment grew for the third straight month, and new export orders showed resilience. However, business confidence fell to its lowest level in over six years.

On August 5, data from RatingDog's latest PMI survey showed the headline General Services Business Activity Index plunged from 54.1 in June to 50.4 in July, marking the lowest reading since September 2024. This indicates that the services sector expansion has slowed for the second consecutive month.

Meanwhile, the Composite Output Index dropped from 53.6 in June to 50.8, representing the slowest growth rate in nearly a year.

Despite the convergence of overall growth momentum, several positive factors supported the current services landscape: employment expanded for the third consecutive month, new export orders remained resilient, and the upward trend in input costs continued to ease. RatingDog founder Yao Yu noted that the services PMI is expected to remain above the expansion threshold in the near term, but the pace of recovery will depend on the trajectory of domestic demand and business confidence.

Slower Expansion in Both Activity and New Orders

The July reading of 50.4 for the Services Business Activity Index means that services output has maintained growth for 43 consecutive months, though the pace of expansion was the slowest in nearly a year. Total new business also continued to grow, extending a streak of more than three and a half years, but the growth rate eased to a four-month low.

Yao Yu pointed out that the drivers behind the increase in business activity included client expansion, project acquisition, business development, and growth in AI-related services.

Composite PMI data showed that new orders grew for the 14th consecutive month in July, but at the slowest pace since March this year, with declines observed in both the manufacturing and services sectors.

Export Orders Show Resilience as a Relative Bright Spot

Against the backdrop of subdued domestic demand, services exports performed relatively steadily. New export orders for services expanded for the third consecutive month in July and maintained a relatively fast growth rate. The relevant index registered 52.0, the second-highest reading so far this year.

Survey data indicated that growth in overseas customer demand was linked to exhibition activities, study tours, settlement business increases, and effective client management. Yao Yu stated that the resilience of overseas demand was one of the few positive signals in the July services data.

Employment Grows for Third Straight Month, Longest Expansion Sequence Since H2 2024

Despite the slowdown in overall business expansion, the scale of employment in the services sector continued to expand. Employment grew for the third consecutive month in July, marking the longest continuous expansion sequence since the second half of 2024. Reasons for the hiring included business scale expansion, increased project workloads, and the launch of new business lines.

The sustained employment growth also helped to partially absorb the increase in outstanding business, with the backlog of work growing at a slower pace in July. However, backlogs have now risen for the ninth consecutive month, the longest continuous growth sequence since 2023, suggesting that underlying demand still has support.

On a composite PMI basis, employment also expanded for the third straight month, the longest continuous growth streak since mid-2023.

Cost Pressures Continue to Ease, Selling Prices Increase Slightly

Cost pressures in the services sector continued to moderate in July. While input costs have risen for 17 consecutive months, the rate of inflation cooled further, falling to its lowest level since January 2026—well below the near-19-month high recorded in May. Rising costs for raw materials, labour, advertising, and diesel were identified as the main cost drivers.

As the upward trend in costs eased, service providers still chose to raise their selling prices. This marked the second consecutive month of price increases, the first instance of back-to-back price hikes in a year and a half. The price increases were attributed to the pass-through of cost pressures, rising operating expenses, oil price fluctuations, and adjustments to insurance rates.

On a composite PMI basis, both input price and output price inflation fell to six-month lows.

Business Confidence Hits Over Six-Year Low

Regarding forward-looking expectations, overall confidence in the services sector for the next 12 months remained in positive territory in July, but optimism fell to its lowest level since February 2020.

While companies expressed hopes for business expansion plans, improving market conditions, new product launches, promotional activities, and infrastructure projects, some adopted a more cautious stance towards the economic outlook.