BEIJING—China's manufacturing activity expanded at the slowest pace in 17 months in July, an official gauge showed Sunday, reflecting that tightening measures introduced earlier this year and growing uncertainty over global demand continued to weigh on the country's economic expansion.
China's official PMI, issued by the China Federation of Logistics and Purchasing and the National Bureau of Statistics, fell to 51.2 in July from 52.1 in June, the third straight month in which it has declined. The reading was also closer to the expansionary threshold of 50 than it had been in 17 months. A reading below 50 signals contraction.
Also, in a statement issued Sunday after a meeting to plan second-half economic policy, China's central bank said it would continue to implement the current "moderately loose" monetary policy while keeping a close eye on changes in the domestic and international situation, including the European debt crisis and monetary policies of major economies. China's economic policy will need to be "flexible" and "forward-looking," the central bank said.
Last week, the People's Bank of China had struck a confident note, saying the country's current economic slowdown is beneficial for long-term sustainable growth, and there is little risk of a "double-dip" recession.
Sundays' statement added to that view, signaling that the PBOC is unlikely to increase interest rates in the second half of the year, said Ting Lu, China economist of Bank of America Merrill Lynch.
Economists said the decline in the widely watched purchasing managers' index also makes Beijing unlikely to take on any new aggressive tightening measures later this year as inflation pressures are expected to ease further.
"The Chinese economy is slowing down due mainly to the ongoing property tightening measures, but the slowdown is clearly not as dire as some expected. We don't think the current situation warrants an all-out fight to rescue growth," said Mr. Lu.
With the outlook for developed economies increasingly murky, investors, executives and officials are closely watching indications of how China's economy will perform, because it has been the one consistent engine of growth in recent years. China's economy is widely expected to surpass Japan's this year as the world's second largest behind the U.S. based on market exchange rates. It came in slightly behind Japan last year.
In an interview published Friday, Yi Gang, a vice governor of People's Bank of China, mentioned briefly that "China actually is already the world's second largest economy." But it wasn't clear what Mr. Yi based the statement on, and neither he nor the central bank elaborated.
China has long been larger than Japan based on purchasing-power parity measures of their economies, but PPP isn't nearly as widely used to rank economies as market exchange-rate comparisons. A decisive reading showing China surpassing Japan in annual gross domestic product isn't likely until early next year, although it's possible China's economy will be larger than Japan's during this year on a quarterly basis.
Despite the economic slowdown, the PBOC will keep continuity and stability of the monetary policy and won't change the annual credit target of new yuan loans of 7.5 trillion yuan ($1.12 trillion) for 2010 while strictly implementing tight credit policies in buying property that were adopted earlier this year, according to a statement posted on the PBOC website.
The PMI data showed that China's new export orders grew last month from June but the growth slowed, while imports declined in July from June, signalling that exports and imports will continue to post lower annual growth in the coming months.
The new export-orders subindex in the PMI slipped to 51.2 in July from 51.7 in June and the imports subindex dropped to 49.3 from 50.4. China's customs is due to release July trade data Aug. 10.
Meanwhile, inflationary pressures likely continued to weaken last month as the input-prices subindex fell to 50.4 in July from 51.3 in June.
—Liu Li contributed to this article.