China factory activity down to nine-month low in June on weak demand

China's factory activity slumped to a nine-month low in June as demand faltered, according to a preliminary survey, increasing the risk of a sharper second quarter slowdown and adding to the pressure on the central bank to ease policy.

The country's economy grew at its slowest pace for 13 years in 2012 and the data this year have been weaker than expected, sounding warnings the country could miss its growth target of 7.5 per cent for this year, though narrowly.

Also with the economy showing signs of faltering, a squeeze in Chinese money markets over the past two weeks had sharply tightened monetary conditions, adding to the pressure on the People's Bank of China to take steps to soften policy.

Zhang Zhiwei, economist at Nomura International in Hong Kong said, headline activity indicators such as industrial production and fixed asset investment were weak but were not collapsing while labour market conditions remained tight.

He added, Nomura believed the government was committed to tolerating short-term pain to achieve its policy objectives - containing financial risks and secure sustainable growth in the long term.

According to Nomura's projections there was a 30-per cent chance that growth in the second half of this year could be below 7 per cent.

China's manufacturing weakness, coupled with a cash crunch in the nation's money market, would test how far premier Li Keqiang was willing to go in sacrificing short-term expansion for more-sustainable long-term growth, according to analysts.

Following the failure of record credit in the first four months of the year to stoke growth, China's State Council, led by Li, said yesterday that the financial system needed to do a better job of supporting the economy.

China's seven-day repurchase rate, which measured interbank funding availability, was up 270 basis points, or 2.7 per centage points, to 10.77 per cent in Shanghai, according to a daily fixing announced by the National Interbank Funding Center, which was the highest in data going back to March 2003.

According to Xu Gao, chief economist with Everbright Securities Co in Beijing, if market rates remained at such high levels, the only scenario for the Chinese economy was a hard landing. He added, that possibility was now growing now, and it seemed the leadership was deliberately taking a wait-and-see stance to see how low China growth can be.

According to the State Council, authorities would boost credit support for industries the government had defined as strategic and those that were labor-intensive.