China services PMI edges lower in July as companies adopt cost-cutting methods

China’s services sector cooled off during July as companies adopted cost-cutting methods and laid off workers for the first time in four months, a private survey showed Wednesday. However, broader economic conditions improved, raising optimism about the health of the world’s second largest economy.

The Caixin China services purchasing managers’ index (PMI), a monthly survey of over 400 private sector businesses, fell to 51.7 in July from 52.7 the previous month. A median estimate of economists called for a gain to 52.9.

The Composite Output Index, which includes service and manufacturing production, rose to 51.9 in July from 50.3. Any PMI reading above 50 signals expansion in economic output. Moreover, the official services survey showed growth accelerated to 53.9 in July from 53.7 in June.

In addition, Chinese retail sales expanded sharply in June, climbing 10.6 percent annually. That was the highest level since December. On a sector-by-sector basis, building materials saw the strongest gains, rising 14.2 percent. Sales at furniture stores, home appliances, telecommunications and personal care all experienced double-digit growth rates.

"All of the index categories showed signs of deterioration, with employment falling back into contraction territory after three consecutive months of growth," Reuters reported, citing Zhengsheng Zhong, Director of macroeconomic analysis, CEBM Group.

Meanwhile, Caixin's July manufacturing survey, by comparison, was stronger than its official counterpart, raising hopes that the effect of government stimulus spending was starting to benefit smaller private firms as well as larger state-backed ones.