WRAPUP 2-China economy cools as tightening bites; markets swoon

* Official June PMI 52.1 vs forecast 53.1 and 53.9 in May

* HSBC PMI falls to 14-month low of 50.4 vs 52.7

* Govt tightening to blame, but economists see no double-dip

* Stock markets slide after data adds to global econ worries (Adds regional market reaction, comments by state researcher)

By Zhou Xin and Alan Wheatley

BEIJING, July 1 (Reuters) - The pace of Chinese manufacturing growth slowed in June as government steps to cool the property market and curb bank lending combined with a faltering global recovery to dampen sentiment.

Two indexes based on polls of purchasing executives released on Thursday fell, but they showed an expected moderation in the world's third-largest economy and not the precipitous drop that some investors have feared: both gauges remained above the threshold of 50 that demarcates expansion from contraction.

Still, shares in Asia and Europe fell as the reports added to investors' concerns that the global recovery was faltering.

Zhang Liqun, a government economist, spoke of a "steady slowdown" in the broader economy. "China's economy growth is at a critical stage of levelling off after the climb," he said.

Qu Hongbin, chief economist for China at HSBC, said the economy was clearly cooling after year-on-year growth of 11.9 percent in the first quarter.

"But fears about hard-landing are overplayed. We expect China to achieve around 9 percent growth in the second half, underpinned by massive ongoing investment and robust private consumption," he said.

Zhang was commenting on the official Purchasing Managers' Index, which fell to 52.1 in June from 53.9 in May. The reading, the weakest since February, fell short of the median forecast of 53.1 in a Reuters poll of 10 economists. [ID:nTOE65R01K]

A separate survey compiled for HSBC fell more steeply to a 14-month low of 50.4 from 52.7 in May as output and new orders dropped outright for the first time since the depths of the global downturn in March 2009.

The PMIs are designed to provide a timely snapshot of business conditions in manufacturing, and financial markets did not like the picture.

Asia Pacific stocks outside Japan .MIAPJ0000PUS fell 1.3 percent; Japanese shares .N225 fell 2 percent to a seven-month low; Australia's benchmark index .AXJO dropped 1.5 percent to an 11-month low as resource firms reliant on Chinese demand buckled; and the Australian dollar fell. [MKTS/GLOB]

FEELING THE PINCH

The official PMI also showed broad-based softness, with sub-indexes for output, new orders, new export orders, backlogs of work, imports and employment all falling on the month.

"The Chinese economy is cooling down, and the export and import sector is the first to feel the pinch," said He Yifeng, an analyst with Hongyuan Securities in Beijing.

He said the official PMI could fall further in July but might well then recover as the impact of tightening measures wanes.

"There is no need to worry too much about a double dip in the Chinese economy," he said. "If there are no new tightening measures, the Chinese economy is likely to remain healthy."

But Fan Jianping, head of economic forecasting at the State Information Center think tank, said the annual rate of growth would gradually slow as the year went on.

From the peak of 11.9 percent in the first quarter, Fan forecast that the pace of expansion would slow to 8.2 percent in the final three months of 2010. [ID:nTOE660047]

The economy is reacting to steps to reel in risky borrowing by already overindebted local governments. Beijing has also applied the brakes to the runaway property market.

It has raised down payments, scrapped discounted mortgage rates and introduced new rules making it harder for speculators to buy multiple homes. Real estate sales and prices in some cities have tumbled in recent weeks as a result.

But although the property sector makes up about 10 percent of national output and a quarter of investment, Premier Wen Jiabao signalled this week that it was too soon to ease the curbs.

The economy was headed in the direction the government expected and policy would not change, Wen told economists and businessmen in remarks reported on Wednesday. [ID:nTOE65T03Y]

One crumb of comfort, economists said, is that a sharp drop in inflationary pressures -- measured by the prices manufacturers paid for their inputs in June -- should reassure policymakers that the risk of credit-fuelled overheating is fading.

GRIM EXPORT OUTLOOK

According to the National Bureau of Statistics, the drop in the official PMI reflected the impact of policy tightening as well as a "grim" outlook for exports.

The debt woes rattling the euro zone, China's recent abolition of some export tax rebates and the prospect of increased trade friction were all weighing on exporters.

Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong, said slower growth in the second half was inevitable as the initial boost from last year's 4 trillion yuan ($585 billion) stimulus package starts to fade and policy tightening bites.

"How sharp this slowdown will be will depend heavily on what happens to Chinese exports. Exports across the region have continued to post strong growth so far this year, but recent events in Europe clearly represent a major downside risk in the months ahead," he said in a note. (Additional reporting by Polly Yam in Chengdu; Editing by Kazunori Takada)