The report is another example that the world's second-largest economy could continue to lose momentum in the second half of 2020.
The Caixin China General Services Business Activity Index fell to 54.1 last month, the weakest reading in three months. Previously, the report saw a decade-high of 58.4 in June.
The index is used to give an independent snapshot of operating conditions in the services sector. A number above 50 demonstrates an expansion in activity, while a figure below it points to a recession.
Economists have stated recovery has been uneven, due to the release of pent-up demand that followed the Covid lockdown that is now starting to dissipate.
The service sector's recovery was slower than the manufacturing sector as concerns over the renewed risk of Covid cases puts a larger damper on the restaurant, film, tourism, and hotel industries.
The measure for new export business dived into negative territory in July due to the ongoing pandemic.