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 Even more worrying, China's services sector, which has been one of
the lone bright spots in the sputtering economy, also showed signs
of cooling, a similar business survey said.
Hurt by soft demand, overcapacity and falling investment, the
economy has also been buffeted by plunging shares and a shock yuan
devaluation, in what some have called a "perfect storm" of factors
that is rattling global markets and could strain relations with
China's major trading partners.
Japanese Finance Minister Taro Aso said on Tuesday it would be
beneficial for this week's meeting of the Group of 20 major
economies to discuss what is going on in China's economy.
"Capital market turmoil has made Chinese businesses and consumers
turn more cautious," Bill Adams, a senior economist at PNC Financial
Services in Pittsburgh, said in reference to a 40-percent plunge in
Chinese shares since mid-June.
Adams said China's economy could grow around 6.5 percent in the
second-half of the year, easing to 6.2 percent in 2016.
Some analysts believe growth levels are already well below that,
putting Beijing's official target of 7 percent at risk.
News of deteriorating business conditions set off fresh selling in
Chinese shares, with the blue-chip CSI300 index tumbling 4 percent
at one point, dragging down stocks across Asia as well as U.S. stock
futures. [MKTS/GLOB]
Analysts said the bleak readings affirmed bets that China, which has
slashed interest rates five times since November, must loosen policy
again soon to avert a sharper economic downturn that could weigh on
global growth even as the U.S. central bank prepares to raise
interest rates.
China's official manufacturing Purchasing Managers' Index (PMI) fell
to 49.7 in August from 50.0 in July, the National Bureau of
Statistics said on Tuesday. That was in line with a Reuters poll but
the lowest since August 2012, and below the 50-point mark separating
growth from contraction.
New orders - a proxy for domestic and foreign demand - fell to 49.7
in August from July's 49.9. New export orders contracted for an 11th
straight month.
A private survey by Caixin/Markit focusing on smaller factories
pointed to an even sharper cooldown, with the PMI dropping to 47.3,
the worst reading since March 2009.
Both surveys showed manufacturers were laying off workers at a
faster rate as their order books shrank.
The closure of factories in northern China to clear Beijing's skies
for a huge military parade this week likely also hurt output, as did
a giant blast in the port city of Tianjin.
SERVICES FIRMS LOSING STEAM
China's services companies are also showing clear signs of fatigue,
to the point where growth in that sector may no longer be enough to
offset persistent factory weakness.
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The official services reading cooled slightly to 53.4, while
remaining well in expansion territory, but the private survey PMI
fell sharply to 51.5, its lowest level since July 2014.
That dragged a composite PMI combining factory and services readings
to below 50 for the first time since April 2014.
In another sign that economic weakness was spreading to the services
sector, the Caixin/Markit services PMI showed the labor market
deteriorated for the 22nd straight month in August. Employment in
the services sector fell to 50.1, barely remaining in expansionary
territory.
"We believe further aggressive monetary easing and proactive fiscal
policy, along with financial liberalization, are needed to maintain
growth at around 7 percent," ANZ economists said.
A flurry of earnings reports from top Chinese banks in the past week
showed they were struggling with the slowest profit growth in at
least six years and a jump in bad loans, and the slump in stock
markets in recent weeks is likely to reduce contributions from the
financial sector in coming months.
"Recent volatility in global financial markets could weigh on the
real economy, and a pessimistic outlook may become self-fulfilling,"
said He Fan, Chief Economist at Caixin Insight Group.
Chinese authorities have launched their most aggressive policy
loosening campaign since the 2008/09 global financial crisis to try
to put a floor beneath sagging growth.
But the effectiveness of more monetary policy easing has been called
into question, with some warning of a "liquidity trap" if China
continues to pour cash into a system where the last thing struggling
companies want is to take on more debt.
The last time China slashed interest rates was on Aug. 25, when it
also lowered the amount of reserves banks must hold for the second
time in two months.
(Additional reporting by Kevin Yao in BEIJING; Writing by Koh Gui
Qing; Editing by Pete Sweeney and Kim Coghill)
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