However, economists said that when seasonal adjustments were factored in, the reading showed some improvement from June, a trend in line with a separate PMI released yesterday by HSBC and Markit Economics. The HSBC-Market index rose from 48.2 in June to 49.3 last month.

'The PMI showed signs of stabilising in July, suggesting pro-growth measures have started to show effect,' China International Capital chief economist Peng Wensheng said.

'The authorities are expected to maintain the easing stance as the persistent weakness in demand has started to affect employment.'

The official PMI's sub-index of employment edged down from 49.7 in June to 49.5, its third monthly drop in a row and second month of contraction.

Barclays Capital economist Chang Jian said: 'Employment has not yet become a serious problem, but the risk of more job losses in the manufacturing sector is rising.'

In the official PMI, the production sub-index softened from 52 in June to 51.8 in July, while new export orders fell from 47.5 to 46.6, pointing to further worsening in external demand as a result of the European debt crisis.

China should put growth stabilisation 'in a more prominent position', President Hu Jintao said at a Politburo meeting on Tuesday. The nation has changed focus from inflation control to growth stabilisation since April after the economy expanded 8.1 per cent in the first quarter, the slowest pace in three years.

The central bank has cut interest rates twice since June 8 and reduced the amount of cash banks must set aside as reserves three times since November. Many economists forecast more reductions in interest rates and the reserve requirement ratio if exports slow sharply.

Morgan Stanley economists said in a research note that more measures to boost the economy were expected in the coming months in infrastructure investment, social housing, and the extension of structural tax reforms to more regions.

50.1

The July reading of the official purchasing managers' index

- The HSBC-Markit index reading was 49.3