Flash China Caixin PMI falls to 47.1 in August

Employees work in a textile factory in Suzhou, China.
China Daily | Reuters
Employees work in a textile factory in Suzhou, China.

The preliminary reading for a key Chinese purchasing managers' index (PMI) fell to a near six-and-a-half-year low of 47.1 in August, below a Reuters forecast of 47.7, underscoring persistent sluggishness in country's vast factory sector.

The final Caixin China PMI dropped to a two-year low of 47.8 in July, while the official China PMI avoided falling into contraction territory by coming in at 50 for the month. Caixin's China PMI data tends to focus on smaller and medium-sized companies, filling a niche that isn't covered by the official data.

"The Caixin Flash China General Manufacturing PMI for August has fallen further from July's two-year low, indicating that the economy is still in the process of bottoming out," said He Fan, chief economist at Caixin Insight Group.

"There is still pressure on maintaining growth rates, and to realize the goal set for this year the government needs to fine tune fiscal and monetary policies to ensure macroeconomic stability and speed up the structural reform," added said.

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

Read MoreCaixin China PMI for July at two-year low

A breakdown of the August survey showed both the new orders and new export orders sub-indexes declining at a faster rate than in July – a sign of accelerating weakness in domestic and external demand.

Recent data out of the world's second largest economy have signaled weakening growth momentum in the second half of the year.

A spate of economic activity data for July published earlier this month - including industrial production, retail sales and fixed asset investment - came in below market expectations, underscoring the People's Bank of China's move to weaken the yuan. Last week, the central bank surprised markets by sharply devaluing the yuan, which the government said was part of reforms meant to make its exchange rate more market-oriented.

Bill Adams, senior international economist at PNC Financial Services Group, said August's flash PMI reading showed that China was adding to global inflation doldrums.

"At the margin, this additional evidence of China's weakening economy puts downward pressure on global prices of oil, coal, iron ore, steel and other basic materials. China is one more force for weak global inflation in late 2015 and 2016," he said.

Adams expects China's gross domestic product (GDP) growth may slip below 7.0 percent in the second half of 2015. The economy grew an annual 7.0 percent in both the first and second quarter of this year.

Julian Evans-Pritchard, China economist at Capital Economics, on the other hand, believes downside risks to growth in the short-run are now overstated.

"Credit growth has begun to accelerate on the back of recent policy easing, which should feed through into stronger activity, albeit with a lag," Evans-Pritchard said.

"The fiscal stance is also set to loosen in coming months as local governments accelerate spending to hit annual budget targets. Finally, the government still has plenty of policy ammunition and we think they would rather step up policy support rather than allow growth to slip much further," he added.