By Koh Gui Qing
BEIJING (Reuters) - Growth in China's vast factory sector cooled in August as foreign and domestic demand slowed, two surveys showed on Monday, spurring new calls for more policy easing to prevent the economy from stumbling once more.
A purchasing managers' index (PMI) published by the National Bureau of Statistics fell from a 27-month high to 51.1 in August, slightly less than forecast as factories shed jobs for at least the 24th consecutive month.
A separate, private PMI was more torpid. The final HSBC/Markit PMI eased to 50.2 in August, close to the preliminary reading of 50.3 and only a shade above the 50-point mark demarcating an expansion in activity from a contraction.
The declines in both PMIs prompted some analysts to re-state their support for more policy action to lift the fading growth momentum in the world's second-biggest economy.
"If we now start to see a serious challenge to growth, the pressure to do more will intensify," said Louis Kuijs, an economist at RBS.
He said the central bank could cut interest rates or reduce the amount of reserves that banks must hold as deposits to re-stoke the economy.
Mainland stocks rose marginally after the PMIs, as investors bet that poor economic data may force the central bank to loosen policy and increase liquidity, to the benefit of share prices.
But swap traders had not yet priced in a rate cut. The rate swap for the one-year deposit rate (CNAMAD2YF=) was priced at 2.91 percent, close to the current 3 percent interest rate level. Rates would fall to 2.75 percent should authorities cut them by 25 basis points. [ID:nL3N0QW17D]
China's economy has had a rocky spell this year. Growth sank to an 18-month low of 7.4 percent in the first quarter before edging up to 7.5 percent between April and June.
Hopes that the mild rebound would gain traction were dashed last month when growth in retail sales and fixed asset investment slowed, while money injected into the economy unexpectedly tumbled to a near six-year low.
Monday's PMIs showed the outlook remains cloudy.
A breakdown of the official PMI - which is biased towards larger, state-owned factories - showed output, employment, new orders, delivery time and raw material inventory falling across the board, with the labor market showing the most weakness.
It was the first time in six months that the official PMI had witnessed a decline.
The employment sub-index, which has stayed under 50 for at least two years, slipped to a three-month low of 48.2 in August. New orders, a proxy for domestic demand, also fell to 52.5 from July's 53.6.
The HSBC/Markit PMI also pointed to slackening demand. Firms had reported "subdued client demand" for new orders, especially for those selling investment goods, it said, adding that a number of companies had also cut spending on steel in particular.
New orders and new export orders fell to their lowest in two to three months for the HSBC/Markit PMI. The new orders sub-index being the worse performer of the two, shedding two full points to 51.3 from July.
"The economy still faces considerable downside risks to growth in the second-half of the year, which warrants further policy easing," said Qu Hongbin, an economist at HSBC.
Cooling activity has hurt factories across China.
More Chinese manufacturers were falling behind on their payments as economic growth falters, causing accounts receivable to spike 1.1 trillion yuan ($179 billion) in the first six months from the year-ago period, the government said last month.
A Reuters poll in July showed economists were divided over whether the central bank would attempt to boost lending by reducing the amount of deposits that banks must set aside as reserves.
The poll showed half of 14 economists polled thought the central bank would reduce the reserve requirement ratio (RRR) by 50 basis points between October and March next year. Only one of 15 economists polled predicted a cut in interest rates.
Worried that the economy was cooling too quickly, Chinese authorities started loosening policy in modest steps from April. Some construction projects were brought forward, the RRR for some banks was lowered, and property controls were relaxed to boost a cooling housing market.
Just last week, the central bank said it was lowering its re-lending interest rates for agricultural loans by 100 basis points. The government in Hangzhou, one of the Chinese cities worst hit by an oversupply of homes, also said it will abolish all home purchase restrictions in the city.
Yet some analysts say these modest steps may not be enough.
"The effect of the 'mini stimulus' conducted in the last few months is fading fast," ANZ said in a note to clients.
"Authorities will need to cut RRR on large commercial banks in order to reduce China’s funding costs fundamentally," it said.
(Additional reporting by Pete Sweeney in Shanghai; Editing by Richard Borsuk)
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