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China's factory activity falls to 3-month low in August

China's factory activity fell to a three-month low in August, a private survey showed on Thursday, signaling continued weakness in the sector despite the recent burst of stimulus from the government.

The HSBC flash Purchasing Managers' Index (PMI) came in at 50.3, much lower than a Reuters poll expecting 51.5 and following an 18-month high of 51.7 in July.

It's the lowest reading since May, although it remained above the 50-mark which separates expansion from contraction.

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The Australian dollar slumped following the data, falling to $0.9246 from $0.9280. China's Shanghai Composite Index fell 0.4 percent while Hong Kong's Hang Seng Index lost 0.4 percent.

"Sharp falls in the output and new orders components, which both dropped to 51.3, from 52.8 and 53.3, respectively, were largely responsible for the lower headline index. The export orders sub-index also fell, but by a smaller margin, suggesting that the weakness is mostly domestic," said Julian Evans-Pritchard, China economist with Capital Economics.

"The drop in the PMI is perhaps not surprising given last month's disappointing activity and lending data. After rushing to shore up growth in Q2, it seems that policymakers are now taking a more hands off approach, with support from infrastructure spending beginning to level off," he added.

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Beijing unleashed a slew of measures in recent months to support an economy trying to engineer a rebalancing away from a focus on manufacturing towards domestic consumption.

Growth in the world's second-biggest economy came in at 7.5 percent in the second quarter after slowing to 7.4 percent in the first quarter, its slowest pace in six quarters.

The data came a week after China released a batch of weak credit readings which showed the amount of money flowing into China's economy slowing to the lowest level in nearly six years in July. China's new bank loans issued also fell two-thirds on-month to $62.5 billion.

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"We've seen across the board weakness in July data so we think some of that might spill over into August and September," said Erwin Sanft, managing director and head of China & Hong Kong equity research at Standard Chartered.

Robert Parker, vice-chairman at Credit Suisse Asset Management, said the soft manufacturing figures are a surprise, but he expects the PMI to have hit a low in August in the short term.

"If we look over the next 3-4 months how the numbers are going to evolve, my argument is the numbers will stay above 50 and there is a high probability that as we go into September, October and November, the numbers will creep back into 52 perhaps 52.5. This I would say will be the lowest number we are going to see for the next 3 months," he said.

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"Let's not forget the HSBC number tends to focus more on small-caps, rather than large-cap sectors so the official numbers will probably be higher than the HSBC number," he added.

Both the official PMI and the final HSBC PMI readings are due on September 1.

Analysts broadly see Thursday data as a one-off blip, with recovery continuing for the rest of the year and policymakers stepping in where necessary.

"Cut through all these, the trend for China over the next 3-6 months will be: consumption holding up to 11 to 12 percent on-year growth driven by strong wages; investment spending holding up the balance of all of that will translate into annualized growth of close to 7.5 percent. So no hard landing with growth actually rebounding following the weak numbers in the first half of the year," Parker said.

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