HSBC's China Flash PMI for July – an indicator of industrial activity – dropped by its fastest pace since March 2009.
The purchasing managers' survey shows a monthly contraction in the country's vast manufacturing sector for the first time in 12 months, while a price sub-index signalled rebounding inflation.
The flash purchasing managers' index (PMI), the earliest available indicator of China's industrial activity, dipped to a 28-month low of 48.9 in July and fell below the 50-point level for the first time since July last year, as policy tightening and slack global demand weighed on economic growth.
That compares with the final reading of 50.1 in the HSBC PMI for June. The 50-point level in the PMI demarcates expansion from contraction, with a reading above 50 indicating growth.
According to the final PMI reading in June, the industrial output sub-index fell to 49.8, indicating a contraction for the first time since July last year. That trend has now been confirmed with the overall July Flash PMI reading.
"We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through," said Qu Hongbin, the chief China economist at HSBC.
"That said, resilience of consumer spending and continued investment in a massive amount of infrastructure projects should support a nearly 9 per cent rate of gross domestic product growth in the rest of the year," he said.
China's industrial output rose 15.1 per cent in June from a year earlier, accelerating from 13.3 per cent in May, according to official data.
According to the flash PMI, China's sub-index of factory input prices rebounded to 54.5 in July from the final reading of 51.9 in June.
China's annual inflation hit a three-year high of 6.4 per cent in June. Many economists believe inflation may have peaked or should peak soon as food prices stabilise but price pressures may be entrenched as wages and utility costs climb.