China June Flash HSBC PMI Falls to 9-Month Low

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Activity in China's vast factory sector decelerated further in June, a private survey of Chinese manufacturers showed on Thursday, casting a pall on markets and stoking further concerns over the health of the world's second largest economy.

The closely-watched flash estimate of the HSBC China Purchasing Manager's Index (PMI) fell to a nine-month low of 48.3, worse than the final reading of 49.2 in May when the index moved into contractionary territory for the first time in seven months.

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

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"I think this is proof that actually there is a deceleration in the Chinese economy," said Frederic Neumann, co-head of Asian Economics Research at HSBC.

"Second quarter (growth) is going to come in below the first quarter and there's no end in sight – because we haven't seen a clear signal that policymakers are stepping up to support the economy."

Neumann was referring to a lack of action from authorities to ease the liquidity crunch in China's financial sector. The seven-day repo rate, which is regarded as a key indicator of market liquidity, soared to a record high of 10.2 percent on Thursday.

According to China watchers, the tight conditions in the money markets have been triggered by a sharp slowdown in foreign exchange inflows and seasonal factors such as last week's three-day public holiday.

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"A central bank can always provide liquidity but the fact that they choose not to suggests that they [policymakers] really want to bring in some interest rate risk back into the economy, make people think twice before overloading themselves with debt," he added.

China's economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has underwhelmed, prompting warnings from market watchers that the country could miss its growth target of 7.5 percent for this year.Ahead of the PMI release, HSBC, which has been bullish on China's economy, also slashed its growth targets for the country. It now expects the economy's gross domestic product to come in at 7.4 percent for this year and for 2014, compared to earlier targets of 8.2 percent and 8.4 percent,respectively.

According to Nomura, who sees a 30 percent probability that Chinese growth will fall below 7 percent in the second half of this year, the fall in the PMI reinforces the downside risk to the economy, but noted that signs aren't pointing to a distressed situation yet.

"Headline activity indicators such as industrial production and fixed asset investment are weak but are not collapsing, while labor market conditions remain tight," Zhiwei Zhang, economist at Nomura in a research note.

"We believe the government is committed to tolerating short-term pain to achieve its policy objectives – containing financial risks and secure sustainable growth in the long term," he added.

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The data exacerbated a sell-off in Asian stocks, which were already lower after the U.S. Federal Reserve on Wednesday suggested the central bank could moderate its bond purchases later this year.

Australian equities led losses by 2 percent, Japan's benchmark Nikkei fell 1 percent, knocked off the previous day's one-week high. Both South Korea's benchmark Kospi and the Shanghai Composite traded at 2013 lows.

The Australian dollar also took a dive, falling to a fresh 33-month low against the greenback on Thursday. The Aussie shed more than a third of a cent to a low of $0.924.

- By's Li Anne Wong; follow her on Twitter: @LiAnneCNBC