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China July flash HSBC PMI plunges to 11-month low

Stringer | AFP | Getty Images

China's manufacturing activity shrank for a third straight month in July, a private survey of Chinese manufacturers showed on Wednesday, highlighting persistent weakness in both external and domestic demand.

The closely-watched flash estimate of the HSBC China Purchasing Manager's Index (PMI) fell to an 11-month low of 47.7 from 48.2 in June. This was significantly below market expectations for the index to hold steady at 48.2.

A reading above 50 indicates expanding activity and one below 50 signals contraction.

The slowdown in the manufacturing sector is leading more factories to cut back on workers, with the unemployment sub-index falling to a 52-month low of 47.3.

"The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking," said Hongbin Qu, Chief Economist, China & Co- Head of Asian Economic Research at HSBC.

(Read more: China PMI slump will test authorities' resolve)

"This adds more pressure on the labor market. As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilize growth," he said.

Premier Li Keqiang on Tuesday identified 7 percent as the "bottom line" for growth, local media reported, saying that this this threshold must not be breached.

(Read more: China: From driver to drag on global growth)

This has raised expectations for the government to announce fresh stimulus as insurance against growth decelerating sharply.

"Such a negative scenario will not materialize and that China will announce new stimulus measures soon - modest and targeted ones but sufficient for growth to achieve this year's 7.5 percent goal. The worst the PMI the bigger the measures would be," wrote Darius Kowalczyk, strategist at Credit Agricole.

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