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China factories stall for second straight month

China's manufacturing activity remained in contraction for a second straight month, a private survey showed on Friday, underscoring the sluggish Chinese economy and adding to the case for further monetary policy easing.

The flash HSBC Purchasing Managers' Index (PMI) came in at 49.8, after registering a 49.6 final reading in December, its first contraction in seven months. The 50-point mark separates growth from contraction.

Chinese markets were little changed following the data. The Shanghai Composite index trimmed gains briefly but has since rebounded back to a 0.6 percent gain, while the Hang Seng index held steady at a 1.4 percent rise. The Australian dollar advanced against the U.S. dollar to fetch $0.8050, but has since backed down to trade at $0.8030.

John Phillips | CNBC

"We're not out of the woods yet, still continuing to see contraction in China," said Frederic Neumann, co-head of Asian economics research at HSBC. "It's not the export sector that is problematic, it is the domestic sector. There are still reports of insufficient credit to small and medium enterprises, which is supposed to help stabilize manufacturing."

The survey showed final demand for China's factory goods rose this month, but only modestly as the sub-indices for new orders and new export orders stood close to the 50-point threshold.

Reflecting the tumble in oil prices, which have more than halved in the last six months, a sub-index for input prices sank to 39.9, a level not seen since the global financial crisis.

China's economy expanded at the slowest pace in 24 years in 2014, data showed this week, with gross domestic product rising 7.4 percent, just shy of the government's target of "around 7.5 percent."

A growing number of analysts are penciling further moves by the central bank to support the economy. The People's Bank of China (PBOC) in November surprised markets with an interest rate cut, its first since 2012.

"Stay tuned for more news from PBOC. We expect two more rate cuts, three more cuts in banks' reserve requirement ratio and quite substantial easing," he said.

— Reuters contributed to this report.