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The government's non-manufacturing purchasing managers' index (PMI) rose to 54.1 last month from June's 53.9, the National Bureau of Statistics (NBS) said in a statement. A reading above 50 indicates activity in the sector is accelerating, while one below 50 indicates it is slowing.
The services sector index followed the bureau's manufacturing PMI on Thursday, which showed China's factory activity was slightly stronger than expected in July.
The latest data "indicate the non-manufacturing sector is improving, with the new orders sub-index consistently staying above 50, setting a good foundation in terms of demand for a stable growth," said Cai Jin, a vice head of the China Federation of Logistics and Purchasing, which compiles the index on behalf of the NBS.
"In general, the index pointed to a good start of the economy in the second half. Although there are still challenges, China has the foundation and conditions to maintain stable economic development," Cai added.
The services industry accounted for 46% of the Chinese economy in 2012, and overtook manufacturing as the biggest employer in 2011.
China's economic growth unexpectedly stumbled in the first half, as factory output and investment slowed.
To prevent it from slipping too far, Beijing has announced a series of targeted fine-tuning measures to safeguard growth. The politburo, China's top decision-making body, has pledged stable economic growth in the second half as it presses ahead with reforms and restructuring to make domestic consumption the main driver of economic growth.
The government is betting on a developing services industry to absorb surplus workers to be laid off by the restructuring move.
It has also announced several measures to support small firms, including scrapping business and value-added taxes for small firms, cutting red tape for importers and exporters, simplifying foreign exchange rules for the services industry and allowing small firms to issue more bonds.
The central bank has also pledged to improve the financial environment for small companies, which employ tens of millions, promoting innovation in financial products and services to take into account the varying needs of small businesses.
Inflation
The PMI's sub-index measuring new orders remained the same at 50.3 in July as it was in June, while the reading for new export orders rose to 53.1 compared with June's 50.4.
In a breakdown of sectors, growth in the tourism and telecom industries gained traction rapidly, raising the employment sub-index in the services sector to 53.0 in July, up from 50.0 in June.
Although the headline figure for small non-manufacturing firms still remained below 50, the reading reversed falls in the past two months.
The PMI also showed rising inflationary pressure, with the sub-index measuring input prices rising to 58.2 last month from June's 55.0, while the reading for service charges increased to 52.4, the highest since May 2011.
The input price in the official manufacturing PMI rose to 50.1 in July, ending its three-month-long contraction.
The central bank also remained hawkish against price rises in its second-quarter monetary policy report released on Friday.
"We must not be blindly optimistic about consumer price situation in the next phase. We must continue to guide and stabilize inflationary expectations," it said.
The NBS is scheduled to announce inflation data on Friday.
China's consumer inflation has remained benign so far this year at levels below the benchmark one-year deposit rate of 3.0%. Beijing has set a target for full-year consumer inflation of 3.5% in 2013.
On the producer end, China has run factory-gate deflation since February 2012.
