China's manufacturing activity contracted at a faster pace in June, reducing the prospects of a promising economic recovery, preliminary results of a survey by Markit Economics and HSBC revealed Thursday.
The flash manufacturing purchasing managers' index fell to 48.3 in June from 49.2 in May. The index is now at its lowest level in nine months.
Readings below 50 suggest contraction of the sector. Both new orders and new export orders contracted at faster pace. The manufacturing output index fell to 48.8 from 50.7 in May, marking the lowest level in eight months.
Employment at manufacturers contracted at a faster rate. Meanwhile, the rate of decline in input prices slowed. Output prices continued its downtrend in June, with the pace of decline accelerating from previous month.
"Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures," said Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC.
Chinese authorities have signaled tolerance towards slower growth to give more scope for reforms that may be beneficial to the economy in the longer-term.
In a statement on Wednesday, the State Council said that the government will firmly guard against financial risks, but did not make any remarks on the liquidity crunch. The cabinet also pledged to increase credit to high tech manufacturing and 'strategic' industries.
Meanwhile on Wednesday, Moody's Investors Service warned that Chinese banks faced risks from rising local government debt. The risks reflected the local government financing vehicles' weak standalone credit profiles and the fact that they accounted for 14 percent of total bank loans at end-2012, the rating agency said in a report.
A slew of economic indicators released earlier this month suggested China's economic growth likely slowed further in the second quarter after the first quarter's 7.7 percent expansion.
The World Bank reduced its 2013 growth forecast for China this month to 7.7 percent from its January projection of a 8.4 percent expansion. The growth is expected to accelerate to about 8 percent each in 2014 and 2015, as global conditions improve.
Last month, the International Monetary Fund downgraded its 2013 growth estimate for the economy to 7.75 percent and urged the nation to respond to the challenges especially in the area of social financing and reduce high dependence on investment.
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