China's flash PMI slips to 3 month low in August

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Growth in China's vast factory sector slowed to a three-month low in August as output and new orders moderated, a preliminary private survey showed on Thursday, reinforcing concerns about increasing softness in the economy.

The HSBC/Markit Flash China Manufacturing Purchasing Managers' Index (PMI) fell to 50.3 from July's 18-month high of 51.7, missing a Reuters forecast of 51.5.

It was the lowest reading since May, though the PMI stayed above the 50-point level that separates growth in activity from contraction for a third consecutive month.

"Today's data suggest that the economic recovery is still continuing but its momentum has slowed again," said Hongbin Qu, chief economist for China at HSBC.

"We think more policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity," Qu said.

Most Asian stock markets, including Hong Kong and China, extended early losses after the PMI survey while the Australian dollar fell.

A sub-index measuring new orders, a gauge of demand at home and abroad, fell to a three-month low of 51.3. The sub-index for output also dropped to a three-month low in August.

Employment fell at a faster pace than in July, indicating more layoffs in the manufacturing sector.

Any marked weakening in the labour market would raise alarm bells for China's leaders, who regard healthy employment levels as a top policy priority and an important condition for social stability.

After a hopeful bounce in June, spurred in large part by government stimulus, China's economic growth appears to be softening again, with recent indicators ranging from lending to output and investment all pointing to weakness.

A slowdown in the property market appears to be deepening, chilling activity in related sectors, while some economists fear banks may be increasingly reluctant to extend credit, particularly to private companies, as bad loans continue to rise and asset quality deteriorates.

The world's second-biggest economy grew slightly faster than expected in the second quarter, expanding by 7.5 percent, as a burst of stimulus launched by the government took effect.

But with conditions looking increasingly unsteady, some analysts say even more stimulus may be needed in coming months to bolster growth and offset the downdraft from the housing market.

Chen Dongqi, a researcher at a government think-tank affiliated to China's top economic planner, the National Development and Reform Commission, said this week China should loosen monetary policy further through "modest" cuts in bank lending rates and reserve requirements.

In a bid to re-invigorate the economy, China has relaxed monetary policy since April by easing controls in the property market, accelerating the construction of some infrastructure works, and relaxing reserve requirements for small banks to boost lending.

The final Markit/HSBC manufacturing PMI for August is due September 1.

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