China factory activity hits nine month low, policy action eyed

Thu Jun 20, 2013 5:15am EDT
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By Kevin Yao

BEIJING (Reuters) - China's factory activity weakened to a nine-month low in June as demand faltered, a preliminary survey showed, heightening the risk of a sharper second quarter slowdown and increasing the heat on the central bank to loosen policy.

China's economy grew at its slowest pace for 13 years in 2012 and so far this year data has been weaker than expected, bringing warnings the country could miss its growth target of 7.5 percent for this year, though possibly not by much.

And as the economy shows signs of faltering, a squeeze in Chinese money markets over the past two weeks has sharply tightened monetary conditions, adding to the pressure on the People's Bank of China to take steps to ease policy.

"Headline activity indicators such as industrial production and fixed asset investment are weak but are not collapsing, while labor market conditions remain tight," said Zhang Zhiwei, economist at Nomura International in Hong Kong.

"We believe the government is committed to tolerating short-term pain to achieve its policy objectives - containing financial risks and secure sustainable growth in the long term."

Nomura sees a 30 percent chance that growth in the second half of this year could be below 7 percent.

The flash HSBC Purchasing Managers' Index fell to 48.3 in June from May's final reading of 49.2, drifting further away from the 50-point level demarcating expansion from contraction. It was the weakest level since September.

The Australian dollar hit a fresh 33-month low after Thursday's data, which fuelled worries about a slowdown in Australia's single biggest export market.   Continued...

Employees work inside a Shuanghui factory in Zhengzhou, Henan province in this March 15, 2013 file photo. REUTERS/Stringer/Files