China's services sector experienced its weakest growth pace in 10 months during July 2026, with the RatingDog China General Services PMI declining to 50.4 from 54.1 in June, according to a private survey compiled by S&P Global. The reading missed market forecasts of 53.7, signaling the slowest expansion since September 2024. The moderation reflects weaker gains in both business activity and new orders, which moderated for a second straight month, as reported by Investing.com. Despite remaining above the critical 50-mark that indicates continued expansion, the moderation reflects ongoing challenges in the services sector and represents a significant miss against market expectations.
The services sector's slowdown was primarily driven by softer domestic demand that weighed on business activity and new orders, as reported by Reuters. The growth pace of new business weakened to its slowest since March, indicating weakening domestic consumption patterns. While overseas business continued to improve for a third consecutive month, supported by stronger demand linked to exhibitions, study tours, financial transaction settlements and improved business management, overall momentum remained subdued. The moderation in services activity was accompanied by the slowest increase in new business since March, indicating weakening domestic consumption patterns.
Despite the overall slowdown, employment in the services sector increased for the third consecutive month, marking the longest stretch of hiring since the second half of 2024, according to the survey data. However, employment growth slowed in July compared to June, indicating a moderation in hiring momentum. Input cost inflation eased to its weakest level since January, providing further relief on costs for service providers. This combination of continued employment growth, though at a slower pace, and easing cost pressures offers some positive developments amid the broader sectoral challenges.
On the price front, input costs increased due to higher labour, raw material, advertising, and diesel costs, as reported by S&P Global. However, input cost inflation eased to a six-month low, providing some relief to service providers. Meanwhile, output prices continued to rise, marking the first back-to-back increases in the sector in a year and a half, driven by higher operating expenses, oil prices, and insurance premium changes. This dual pressure on input and output prices reflects ongoing cost pressures in the services sector despite some easing in input cost inflation.
The weaker services PMI contributed to the broader Composite Output Index declining to 50.8 in July from 53.6 in June, suggesting overall economic growth lost momentum at the start of the third quarter, as reported by Reuters. Business confidence also softened to its lowest level since February 2020, reflecting a more cautious outlook among service providers despite expectations that activity will remain in expansion territory in the coming months. This decline in confidence suggests businesses are becoming more cautious about future prospects amid the challenging demand environment and rising cost pressures.
The weaker-than-expected services PMI is likely to impact investor sentiment toward Chinese equities, particularly stocks linked to domestic consumption, retail, travel and property sectors, as it reinforces concerns about sluggish consumer demand. However, export-oriented companies and firms benefiting from overseas demand may remain relatively resilient. The data could increase expectations that Chinese policymakers will introduce additional stimulus measures to support growth, though the weak domestic demand backdrop may keep investors cautious toward China-focused sectors in the near term. The combination of moderating domestic demand and rising cost pressures presents a complex challenge for the services sector's recovery prospects.
