Mainland manufacturing contracted in August for the first time in nine months, a development that could prompt more policy easing by Beijing's economic planners.
The official purchasing managers' index (PMI) dropped 0.9 points to 49.2 last month, from 50.1 in July, in the face of a drop in new orders, weaker production and job losses and weaker production, the National Bureau of Statistics and the China Federation of Logistics and Purchasing said yesterday.
The index fell below 50 for the first time since December. A reading above 50 indicates expansion, while a reading below 50 suggests contraction.
Analysts said weak external demand continued to drag down the nation's economic growth, while domestic demand had yet pick up.
"It's a bit unexpected," said Lu Ting, China economist at Bank of America-Merrill Lynch. He said the PMI reading was significantly below the market consensus of 50 and his bank's forecast of 49.7.
The sub-index for new orders fell to 48.7 from 49 in July, which signalled weaker domestic demand, according to Lu. The employment sub-index edged down to 49.1 from 49.5 a month ago, signalling the job market is under stress. A decline in the sub-index for raw material inventories to 45.1, from 48.5, implies manufacturers lack confidence and points to further weakness in production.
"The markets could be disappointed first and respond negatively to the poor 49.2 reading, but the bad news from the data, especially employment, could be good news for policies," Lu said.
With macroeconomic indicators falling further in August, ahead of the 18th party congress expected this autumn, Lu believes there could be another round of policy easing this month or next. This could take the form of a reduction in the reserve requirement ratio for banks, he said.
"We believe the weak data for August will put pressure on the government to loosen policy further," Nomura economist Zhang Zhiwei said. If other data for the month - for example, industrial production and trade - continued to slide, the case for policy easing would intensify.
"We continue to expect a cut in reserve requirements this month but no more interest rate cuts for the rest of the year due to the government's concern over surging property prices," the analyst said.
Hu Yifan, an economist with Haitong International Securities Group, told Bloomberg that a reduction in banks' reserve requirement ratios "would send a positive signal to the markets to boost confidence, particularly now that the PMI has dipped below the critical mark of 50".