HSBC's China Purchasing Managers' Index fell below the boom-bust line of 50 in July for the first time since the depths of the global downturn in March 2009.

The index dropped to 49.4 from 50.4 in June.
The month-on-month deterioration in Chinese manufacturing, which prolongs a cooling trend that set in at the start of 2010, was led by the second successive drop in output and new orders.

The PMI is designed to provide an early indication of conditions in industry. A figure above 50 points to expansion.

The plunge in the index below that threshold suggests that government steps to slow bank lending, fight property speculation and improve energy efficiency are finding their target.

The new orders sub-index fell in July to 47.9, a 16-month low, from 49.7 in June. There was also an outright drop in new export orders.

"However, there is no need to panic because this is just a slowdown, not a meltdown," said Qu Hongbin, chief economist for China at HSBC.

He said continued investment in infrastructure projects already under way, public housing construction and resilient private consumption would fuel economic growth of about 9% in the second half of 2010 and in 2011.