HONG KONG (MarketWatch) -- Chinese manufacturing activity contracted for the first time in 16 months in July, according to the outcome of a survey released Monday, suggesting production is slowing in response to recent policy tightening. The HSBC China Manufacturing Purchasing Managers Index, compiled by Markit, dropped to 49.4 from 50.4 in June -- falling below the all-important 50-point level that separates expansion from contraction. The PMI survey, formerly conducted by broker CSLA, last showed a contraction in March 2009. "Although reminiscent of the sudden turnaround in August 2008 -- when the headline reading dropped to 49.2 from 53.3 -- July's slide was anticipated. ... More importantly, both the internal and external environments are looking noticeably [better] today than in the wake of Lehman's bankruptcy," said HSBC's co-head of Asian economics research Qu Hongbin. "Fears of a double dip are unwarranted, as ongoing infrastructure investment and accelerated public-housing construction will provide a floor for industrial production growth," Qu said. He added that the Chinese economy had "enough juice" to sustain a 9% growth in gross domestic product through the second half of 2010 and 2011. A rival survey released Sunday by the government-run China Federation of Logistics and Purchasing fell to 51.2 down from 52.1 in June -- also marking a slowdown in manufacturing activity, though unlike the HSBC survey, the reading still showed an expansion in manufacturing. See full report on China Federation's PMI data. Analysts said the expected softness in manufacturing activity is unlikely to force policy makers to either relax or further tighten their policy stance. Hopes for a continued pause in tightening policies, which had weighed on mainland Chinese stock markets until recently, were in fact spurring Chinese shares in Hong Kong and Shanghai on Monday. HSI 21,304, +274.39, +1.30% 24,00022,00020,00018,000 ASON10FMAMJJ "Although the latest policy PMI data has added downside risk to the growth outlook, we don't believe it is bad enough to force a significant policy change in the near future," said Dong Tao, Credit Suisse's chief regional economist for Asia excluding Japan. "We do not expect more tightening, but also don't expect easing yet either." Chinese shares rise Hong Kong's Hang Seng Index rose 1.3% to 21,304.20, and the Hang Seng China Enterprises Index jumped 1.9% to 12,129.23 after the data was released. Shares of China Resources Land Ltd. (HK:1109 17.10, +0.62, +3.76%) (CRBJY 0.00, 0.00, 0.00%) climbed 3.8% and China Construction Bank Corp. (CICHY 42.58, +0.15, +0.35%) (HK:939 6.71, +0.12, +1.82%) rose 1.8%, while Great Wall Motor Co. (HK:2333 15.76, +0.28, +1.81%) (GWLLF 1.90, +0.10, +5.56%) added 1.8%. On the mainland, the Shanghai Composite climbed 1.6% to 2,668.03 by the midday break, with Poly Real Estate Group Co. (CN:600048 13.40, +0.25, +1.90%) rising 1.8% and Qingdao Haier Co. (CN:600690 22.36, +0.47, +2.15%) adding 2.2%. China launches new GPS satellite China launches a global positioning satellite as part of a larger plan to end the country's reliance on U.S. navigation satellites. Video Courtesy of Reuters. Credit Suisse's Tao, however, said that China's industrial production is slowing at a faster pace than its GDP, which could mean that the nation's appetite for commodities will "shrink more than the growth figures suggest." He said investment in infrastructure projects has become "a decelerator now" and that housing construction activities were expected to be the "next decelerator" in the second half of this year, if the slowdown in housing transactions fails to turn back up soon. Despite the moderation in manufacturing and a similar recent slowdown in industrial activity, some analysts expect the positive trend in employment data to reassure policy makers and prevent any hasty reversal of the restrictions they imposed on bank lending and the property market over the past few months. "Given the employment index is holding up well, gaining 1.6 points to 52.2 for July, this slowdown is smooth, orderly and necessary. In our view, there is no strong case for policy relaxation at this stage," Daiwa Capital Markets economist Kevin Lai wrote in a report. In wider Asian market action, Japan's Nikkei Stock Average rose 0.2% in Monday's afternoon trading session, with Australia's S&P/ASX 200 up 0.9%, South Korea's Kospi advancing 1.2%, Taiwan's Taiex climbing 1.8% and India's Sensex expanding 0.9%. Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.

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