China's manufacturing activity slowed sharply in June, survey data showed on Thursday, with the fall in activity blamed on sluggish demand in both the domestic and external sectors. The data calms fears of an overheating economy and suggests the government's policy tightening is having the desired effect.

Markit Economics announced that the HSBC manufacturing purchasing managers' index stood at a seasonally adjusted 50.4 in June, down from 52.7 in May. A reading above 50 indicates expansion, while one below suggests contraction.

"The moderation in the manufacturing PMI implies slower sequential growth in China's manufacturing sector, partly due to the tightening measures taking effect. But fears about hard-landing are overplayed," said Hongbin Qu, chief China economist at HSBC. "We expect China to achieve around 9% growth in [second half 2010] underpinned by massive ongoing investment and robust private consumption."

Premier Wen Jiabao reportedly said earlier this week at a State Council meeting that the Chinese economy is headed in the right direction and that the government will persist with its current policy stance. He said China must continue to maintain stable but fast economic growth, while at the same time managing inflation expectations.

"The domestic and international economic situation is still extremely complex," Wen was quoted as saying at the meeting, which was held on Monday and Tuesday. He promised China will maintain continuity and flexibility in its economic policies.

Chinese manufacturing output fell in June, albeit only slightly, ending a 14-month period of expansion. This was mainly due to a fall in the inflow of new orders - the first in 15 months. Survey data suggested that demand was lackluster from both home and abroad. New export orders fell at the fastest pace since March 2009.

Despite the fall in demand, employment levels in the manufacturing sector were raised for the 13th straight month in June. Those respondents that reported a rise in staffing levels during the month cited efforts to expand production capacity.

Average input costs faced by Chinese manufacturers fell in June, ending a sequence of growth that had stretched to 11 months. Lower prices for a range of raw materials were mentioned as the major contributory factor.

Output prices charged by manufacturers slipped for the first time in a year in June, with respondents citing lower input costs. Some panelists also attributed client requests for discounts.

The HSBC PMI report on manufacturing is compiled based on a survey of purchasing executives in over 400 manufacturing companies across China and serves as an indicator of the overall health of the country's manufacturing sector.

A separate measure of the manufacturing PMI released earlier by the Federation of Logistics and Purchasing showed a score of 52.1 in June, down from 53.9 in the previous month. This was the 16th successive month in which the index was above the no-change level of 50.

The CFLP's PMI is semi-official and is used by the government for policymaking. Sub-indices such as production, new orders and purchasing prices all fell, but the overstock index was up.

On Tuesday, a leading indicator for the outlook of the Chinese economy was revised downwards by the Conference Board on Tuesday, suggesting that economic growth may have already peaked following the 11.9% annual expansion in the March quarter. That announcement along with the government's attempts to clamp down on the real estate boom and sovereign debt concerns in Europe have sparked a sell-off in Chinese shares in recent days.

Earlier this month, China signaled an end to its rigid exchange rate policy and allowed its currency, the yuan, to appreciate - another development that may force growth to slow. On Monday, Chinese officials set the central parity rate between the yuan and the U.S. dollar at its highest level in five years. The move followed the G20 summit that took place in Toronto over the weekend. (Provided by RTTNews)