China Caixin factory, service PMIs suggest economic slowdown worsening

SHANGHAI (Reuters) - Activity in China's vast factory sector shrank at its fastest pace in almost 6-1/2 years in August, a private survey showed on Tuesday, increasing investor fears that the world's second-largest economy may be lurching toward a hard landing.

Even more worrying, China's services sector, which had been one of the few bright spots in the sputtering economy, also showed alarming signs of cooling, expanding at its slowest rate in more than a year, a similar business survey said.

"Given sluggish activities during the summer, GDP may fall below 6.5 percent in the third quarter," economists at ANZ said in a research note.

"We believe further aggressive monetary easing and proactive fiscal policy, along with financial liberalization, are needed to maintain growth at around 7 percent," the government's official target for 2015.

Some economists believe China's current growth rate is already much weaker, and investors fear the twin shocks from a yuan currency devaluation and stock market collapse over the summer have put the economy and financial system at even greater risk.

The final Caixin/Markit Manufacturing Purchasing Managers' index (PMI) dropped to 47.3 in August, the lowest reading since March 2009, from July's 47.8. A reading above 50 points indicates growth on a monthly basis, while one below that points to a contraction.

Employment in the factory sector fell for the 22nd straight month while new orders shrunk for a second month to 46.6, the sharpest contraction since March 2014.

"Sub-indices signaled continued weak demand in the market for goods and factors of production," said He Fan, Chief Economist at Caixin Insight Group.

"Recent volatilities in global financial markets could weigh on the real economy, and a pessimistic outlook may become self-fulfilling."

A similar activity survey by Ciaxin/Markit for the services sector showed its growth momentum fell to 51.5, its lowest level since July 2014, from July's 53.8,

Employment in China's services sector fell to 50.1, barely remaining in expansionary territory and posting its slowest pace of growth since August 2013.

Official surveys released earlier in the day showed factory activity shrank to a three-year low of 49.7, while growth in services was still robust but cooled to 53.4.

The Caixin surveys tend to focus on small and medium sized firms, which are facing greater stresses from the economic slowdown, while official data look more at larger, state-owned firms.

Authorities have launched their most ambitious economic support plan since the global financial crisis to try to put a floor beneath sputtering economic growth, including accelerating infrastructure spending and repeated reductions in interest rates and banks' reserve ratios.

But the effectiveness of more monetary policy easing has been called into question, with some warning of a "liquidity trap" if China continues to pour cash into a system where the last thing struggling companies need is to take on more debt.

China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday, ratcheting up support for a stumbling economy and a plunging stock market that has sent shockwaves around the globe.

(Reporting by Sue-Lin Wong; Editing by Pete Sweeney and)