The Caixin/Markit services Purchasing Managers' Index (PMI) fell to 50.3 in June, the lowest since April 2020 and down significantly from 55.1 in May. It held just above the 50-mark, which separates growth from contraction on a monthly basis.
China's official services gauge had also shown a marked slowdown in June, though it remained well in expansion territory. The private survey typically focuses more on smaller companies.
Coupled with a slowdown in manufacturing, analysts say the PMI survey findings suggest that pent-up COVID demand may have peaked and China's robust economic rebound from the crisis is starting to moderate.
Though slower to recover from the pandemic than manufacturing, a gradual improvement in consumption in recent months had boosted the services sector.
But a COVID-19 outbreak of the more infectious Delta strain in the export and manufacturing hub of Guangdong in May-June and the subsequent imposition of anti-virus measures weighed on consumer and business activity.
A sub-index of new business stood at 50.5 in June, also the lowest since April 2020 when the sector was still paralysed by COVID-19 and lockdowns. Firms also cut staff in June for the first time in four months, as a result of slowing demand.
Karaoke outlets, restaurant owners and cinema operators in Guangdong province told Reuters that their business was adversely impacted by social distancing rules during the latest outbreak.
"Our cinema was closed from early June to early July due to the outbreak in Guangzhou. There were zero customers," said a receptionist surnamed Zhu at Zhongying International Cinema in Guangzhou, the provincial capital.