08/26/2015

Activity in China's manufacturing sector likely shrank at its fastest pace in three years in August, a Reuters poll suggested, adding to signs of deepening economic weakness which are shaking global financial markets.

The official manufacturing Purchasing Managers' Index (PMI) is forecast to edge down to 49.7, the weakest level since August 2012, from 50 in July, according to the median forecast of 20 economists in the poll.

A reading above 50 indicates an expansion in activity while one below that points to a contraction on a monthly basis.

A separate private survey released last week revealed that China's factory sector shrank at its fastest rate in almost 6-1/2 years in August, fanning global concerns that the world's second-largest economy may be slowing more sharply than earlier feared.

The official PMI survey is heavily weighted toward larger, state-owned firms, while the private Caixin/Markit PMI is a gauge of smaller ones.

Hit by a property downturn, factory overcapacity, weak exports and high local government debt, China's economy is headed for its slowest growth this year in a quarter of a century.

Some analysts believe current growth levels are already well below the government's official 2015 target of 7 percent.

Shockwaves from the county's collapsing stock markets and Beijing's unexpected devaluation of the yuan earlier this month have added to fears the economy could be at risk of a hard landing, though most economists believe a more gradual but protracted slowdown is more likely.

The central bank on Tuesday cut interest rates and trimmed the amount of reserves banks must hold for the second time in two months, ramping up efforts to support the economy. It has now cut interest rates five times since November, and economists predict more easing measures in coming months.

"I'm expecting to see more targeted policy steps to support the real economy," said Nie Wen, an analyst at Hwabao Trust in Shanghai.

"GDP grew 7 percent in the first half thanks to a booming services industry. But the (economic) situation will be difficult in the second half given the (poor) performance of the stock market."

The PMI factory numbers will be released on Tuesday, Sept. 1, along with official data on activity in the services sector. The Caixin/Markit manufacturing PMI (final) and services PMI will be released on the same day. 

Reuters (Reporting by Kevin Yao and Winni Zhou; Editing by Kim Coghill)