China's manufacturing sector contracted last month for the first time since May last year, an HSBC survey showed yesterday.

The HSBC China Manufacturing Purchasing Managers' Index, a comprehensive indicator of industrial activity, softened to 49.4 last month from 50.4 in June. It dropped below the 50 threshold that divides expansion and contraction, and ended a 16-month-long streak of continued growth for China's manufacturing sector.

The official PMI produced by the China Federation of Logistics and Purchasing stood at 51.2 in July.

The HSBC result marked a turnaround from the strong performance seen at the beginning of 2010, and continued the cooling trend observed since that peak.

The survey, of more than 400 manufacturing companies, is slanted more toward privately owned and export-oriented firms, while the official PMI is weighted heavily toward big domestic companies.

"The decline in the HSBC survey suggests that manufacturing production growth continued to decelerate last month," said HSBC economist Qu Hongbin. "It is because of the combined effect of credit tightening, property cooling measures and China's decision to cut capacity in energy-intensive sectors."

But Qu added: "There is no need to panic because it is just a slowdown, not a meltdown. We still expect the economy to rely on continued investment into ongoing infrastructure products, public housing construction and resilient private consumption to grow by around 9 percent in the second half of 2010 and 2011."

China's gross domestic product grew 10.3 percent in the second quarter, down from the 11.9 percent of the first three months.

Industrial production also cooled, with an annualized growth of 13.7 percent in June, compared to a 16.2 percent rise in May, according to the National Bureau of Statistics.

Some analysts said the slowdown was welcome because it reduced the risk of a hard landing in China's economy which was suspected to be overheated in the first quarter.

The survey also pointed to second successive monthly declines in new business and output, but staffing levels rose for the 14th consecutive month. Meanwhile, suppliers' delivery times lengthened at a moderate rate, and stocks of purchases fell for the second month in a row.

The official PMI, which moderated to 51.2 in July from June's 52.1, has been standing above 50 for 17 months. July's index was also at its lowest since February 2009.

Wang Qing, a Morgan Stanley economist, said the figure could be explained by seasonal factors and supply-side adjustment, rather than by a material weakening in underlying economic fundamentals.

"We believe the Chinese economy is heading toward a soft landing and that concerns over a hard landing are overdone," Wang said.