China factory activity slows further

Textile factory in central China's Anhui province The manufacturing and export sectors play a huge part in driving growth in China

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China's manufacturing activity weakened further in June, falling to a nine-month low as demand fell, according to a preliminary survey by HSBC.

The bank's Purchasing Managers' Index (PMI) declined to 48.3, from May's reading of 49.2. A reading below 50 indicates a contraction.

The weak data comes amid fresh concerns over the health of Chinese economy, the world's second-largest.

Last week, the World Bank lowered its 2013 growth forecast for China.

The bank now expects the China to grow 7.7% this year, down from its earlier projection of 8.4%.

Among the concerns cited by analysts have been fears that a protracted slowdown in key markets such as the US and Europe may hurt demand for Chinese exports and impact its manufacturing sector.

Qu Hongbin, chief China economist at HSBC. said the sector was being "weighed down by deteriorating external demand" as well as "moderating domestic demand".

Reforms v stimulus

Start Quote

We expect the People's Bank of China to ease monetary conditions shortly”

End Quote Dariusz Kowalczyk Credit Agricole-CIB

The data adds to evidence that growth is slowing from 7.7% in the first three months of the year after industrial output and exports came in below expectations.

However, the current leaders have shown more tolerance for slower growth than previous administrations.

After the global financial crisis in 2008-2009, China had unleashed a huge amount of stimulus in an attempt to boost economic growth.

This time there has been no stimulus of that scale.

"Beijing prefers to use reforms rather than stimulus to sustain growth. While reforms can boost long-term growth prospects, they will have a limited impact in the short-term," Mr Qu said.

However, some analysts said that given the slowdown in its economy Beijing was likely to take some steps to try and sustain its growth rate.

"We expect the People's Bank of China to ease monetary conditions shortly," said Dariusz Kowalczyk, senior economist with Credit Agricole-CIB in Hong Kong.

He said that the central bank was likely to announces a cut in the reserve ratio requirement (RRR), the amount of money that the banks are required to keep in reserve, to try and boost lending in the country.

Mr Dariusz added that the recent slowdown in inflation had given more room to policymakers to take such measures.

Data released earlier this month showed that consumer prices in China rose by 2.1% in May, from a year earlier, down from the 2.4% year-on-year growth in April.

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