China manufacturing dips to a nine-month low in August

Workers at a factory in China Manufacturing and export sectors have been key drivers of China's economic growth

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China's manufacturing activity fell to a nine-month low in August, adding to fears that its economy is slowing faster than estimated.

The official Purchasing Managers' Index (PMI) fell to 49.2, the lowest reading since November 2011, data released over the weekend showed.

PMI is a key gauge of manufacturing activity and a reading below 50 shows contraction.

Analysts said China was being hurt by a slowdown in global and domestic demand.

Meanwhile, PMI figures released on Monday for the eurozone showed a similar shrinking picture, with an average reading below 50 for the 17 countries that use the euro and only Ireland among these registering a growth reading of 50.9.

The UK's PMI, also released on Monday, was also below the growth level of 50.

"China's manufacturing sector continues to struggle, weighed down by a significant domestic slowdown, a wholly unsupportive external climate and a completely insufficient policy response," Alistair Thornton of IHS Global Insight said in a note after the data was released.

'Behind the curve'

China's economy saw robust growth in the past few years, boosted in part by record lending by Chinese banks.

Start Quote

The government has underestimated the pace of the slowdown and is behind the curve”

End Quote Alistair Thornton IHS Global Insight

However, the credit boom resulted in a surge in property prices leading to fears over asset bubbles and concerns over whether credit-fuelled growth was sustainable in the long run.

That prompted policymakers to introduce various measures to curb lending.

Analysts said that while the moves had helped to keep asset prices in check, they had impacted the country's economic growth.

China's economy grew at an annual rate of 7.6% in the second quarter, the slowest pace of growth in three years.

"The government has underestimated the pace of the slowdown and is behind the curve," said Mr Thornton at IHS Global Insight.

Less effective tools?

Prompted by fears of a sharp slowdown in the economy, China has taken some measures to ease its policies in a bid to spur growth.

China's central bank, the People's Bank of China has lowered the amount of money banks must keep in their reserves, thrice in the past few months, in a bid to boost lending in the country.

Exporters are being squeezed by a 'lack of access to credit'

It has also cut interest rates twice since June this year, to bring down the cost of borrowing for businesses and consumers.

However, those measures seem to have had little impact on growth.

Analysts said this was because Chinese banks were not too keen to lend money, not least due to fears over slowing growth.

"Banks are not willing to make any large, long-term loans. They are worried about the health of the economy," Mark Matthews of Bank Julius Baer told the BBC.

Also adding to banks' concerns are fears that the record lending over the past few years may result in a rise in bad loans and hurt their profits.

"Past experience has taught us that a bad loan crisis usually came three years after a period of abnormal credit surge," Wei Guoxiong, chief risk management official with the Industrial and Commercial Bank of China was quoted as saying by the Xinhua news agency.

"There will be a notable rise in bad loans in the banking sector this year."

Mr Matthews of Bank Julius Baer said these worries had made the banks "even more cautious about lending in an uncertain economic environment".

He explained that until the banks start to lend money to businesses, the central bank's tools may prove to be ineffective.

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