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China manufacturing sector is losing steam, fast

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Activity in China's manufacturing sector slowed markedly in August, twin surveys showed on Tuesday, the latest sign that the world's second largest economy is fast losing momentum.

The final Caixin/Markit manufacturing purchasing managers' index (PMI) slipped to 47.3 in August, the lowest reading since March 2009 and down from 47.8 in July. The reading, however, was a touch better than the flash reading of 47.1.

A print above 50 indicates an expansion in activity while one below points to a contraction.

"The final Caixin China Manufacturing PMI for August continued to retreat, with sub-indices signaling continued weak demand in the markets for goods and factors of production. Recent volatilities in global financial markets could weigh down on the real economy, and a pessimistic outlook may become self-fulfilling," said He Fan, Chief Economist at Caixin Insight Group.

China's official PMI, released earlier in the day, slipped to 49.7 in August - the weakest level since August 2012 - down from 50 in July and in line with expectations. This is the first time the official PMI has fallen below 50 in six months, according to Nomura.

The official PMI is skewed towards state-owned enterprises and large companies, while the Caixin PMI focuses more on small and medium-sized firms.

"This points to weakening growth momentum in August," said Yang Zhao, China economist at Nomura. "We expect policy to remain accommodative, with additional fiscal stimulus efforts in H2 to boost infrastructure investment and one more 50 basis point reserve requirement ratio cut in Q4," he said.

China's recent run of disappointing data has damped the growth outlook for the second half, with economists now warning growth could dip below 7 percent during the third and fourth quarter. The economy expanded an annual 7.0 percent in both the first and second quarter.

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"We now expect GDP to grow by 6.4 percent y/y in Q3. As more easing measures are expected, growth could rebound to 6.8 percent in Q4," Li-Gang Liu and Louis Lam, economists at ANZ said following the release of the data.

Chinese authorities have stepped up efforts to support growth and fend off deflationary risks, cutting interest rates and the reserve requirement ratio (RRR) - or the amount that banks must hold as reserves - last week.

Despite this, economists expect data for August and September to remain subdued.

"The economy faces heightened economic and policy uncertainty at the present time. This reflects extreme equity market volatility and more recently the sudden move in the CNY fixing, which has amplified uncertainty about the path of the exchange rate going forward," Goldman Sachs wrote in a report on Monday.

"Our estimates suggest it takes a few months for the full impact of "uncertainty shocks" to hit the economy, suggesting downside risk to August and probably September activity data," it said.