China factory activity contracts further in March: HSBC flash PMI

HSBC flash PMI confirms China slowdown: Moody's

China's manufacturing activity contracted for a third straight month in March, a private survey showed on Monday.

The flash Markit/HSBC Purchasing Managers' Index (PMI) came in at 48.1, compared with a final reading of 48.5 in February, staying below the 50-mark that divides contraction from expansion in the sector.

The Australian dollar fell 0.3 U.S. cents to 0.9054 after hitting an intraday high of 91 U.S. cents earlier in the session. Asian stock markets showed little reaction with the Shanghai Composite 0.1 percent higher, while Japan's Nikkei led gains by 1.4 percent.

(Read more:China will avoidpast mistakes on stimulus: Vice Fin Min)

"I think it's a sign that the economy really is contracting, activities are slowing. I think first quarter GDP [gross domestic product] could be on the low side of 7 percent," Alistair Chan, an economist at Moody's Analytics told CNBC, attributing the slowdown to a tightening by the central bank up until June last year.

China's interbank rates, which soared above 10 percent in June last year on concerns of a credit squeeze, have been closely monitored by markets for signs of liquidity strains.

"I think this slowdown is a buildup from that tightening. The loosening in the second half of last year has yet to flow through, so if you look at the stimulus that took place in July, in the form of the increase in bank lending last year, and the recent depreciation of yuan has yet to flow through to the economy," Chan added.

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Concerns are growing over the health of the world's second biggest economy following a recent slew of disappointing data, sparking talk that the Beijing will step in soon to stimulate the economy.

(Read more: China, Japan data infocus for Asia this week)

Vice Finance Minister Zhu Guangyao told CNBC in an exclusive interview over the weekend that authorities would take a cautious approach towards stimulating the economy.

"We don't want to repeat some mistakes before [that] we've made," said Zhu, adding that in the past China had stimulated "too much" and this had hindered sustainable economic growth.

Rob Aspin, head of equity investment strategy at Standard Chartered Bank Wealth Management Group, said the HSBC PMI data affirmed his projections of slower growth in China, which he expects to weaken even further in the coming years.

"We are expecting growth [in 2014] to be around 7.4 percent, the lower side of the range [that Beijing's] given. We're also anticipating growth to weaken to around 7 percent in 2015 and 2016," he said.

(Read more: WillChina's slowdown benefit the rest of the world?)

"This is a very large economy and for China to grow at a 7 percent range is pretty difficult going forward," Aspin added.

China's official growth target for 2014 is 7.5 percent.

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