BEIJING, July 2 (Reuters) - China's factory activity shrank in June at the fastest pace in seven months as new export orders tumbled to depths last seen in March 2009, a private sector survey showed, underlining the risk of a lurch lower for the Chinese economy.
The HSBC Purchasing Managers' Index (PMI) fell to 48.2 after seasonal adjustments, its lowest since November 2011, and little changed from a flash, or preliminary, estimate of 48.1. The final reading in May was 48.4.
June was the eighth straight month of a reading below 50, the threshold dividing expansion from contraction in the survey methodology.
China's official PMI, released on Sunday, also fell to a seven-month low in June. However, the official PMI was 50.2, indicating the sector was still expanding.
The two indexes often give divergent readings as the official PMI surveys mainly big, state-backed firms, while the HSBC PMI takes the pulse of more smaller, private-sector companies.
But both readings underline speculation that Beijing will relax monetary and fiscal policies further to boost domestic activity to compensate for weakening foreign demand for China's factory goods - a problem for the world's biggest exporter.
The survey said export demand from Europe and North America was especially weak.
"We expect more decisive easing efforts to come through in coming months," said Qu Hongbin, an economist at HSBC.
"It is all about growth and employment," Qu said. "As external demand has weakened and domestic demand hasn't shown a meaningful improvement in response to earlier easing measures, growth is likely to be on track for further slowdown."
Like the official PMI, the HSBC PMI showed new orders and new export orders struggling in June below the 50-point threshold, suggesting demand was shrinking.
The new export orders sub-index lost a hefty 2.7 points to sink to a 39-month low of 45.8.
The new orders sub-index also fell, although not as sharply as new export orders. But the combined drop in export and domestic orders was the biggest so far this year, the survey said.
Sliding production cooled prices. Average production costs fell at their steepest rate since March 2009. Prices of finished goods fell at the fastest pace in 42 months, although in part due to competitive pressures between producers.
Crucially, it said there were also signs that factories were saddled with excess capacity as backlogs of work fell slightly as factories received fewer new orders.
Factory employment shrank for the fourth straight month in June, though the employment sub-index rebounded to a three-month high from May's 38-month low.
Job creation is a key indicator for China's government, which calibrates policy to ensure growth is fast enough for the Communist Party to make good on pledges to raise incomes for the poor and achieve social stability, thereby justifying its grip on power.
The loss of around 20 million Chinese jobs in a matter of months towards the end of 2008 during the depths of the global financial crisis, as international trade ground to a halt and factory activity tumbled, prompted Beijing to fashion a 4 trillion yuan ($635 billion) stimulus programme in response.
To shore up the economy this time around, Beijing has lowered interest rates once and reduced banks' reserve requirement ratio twice this year. Investors expect to see more, though few anticipate a full-blown fiscal stimulus package.
A Reuters poll in May showed analysts expect China to lower banks' reserve requirements by another 100 basis points this year to 19 percent for its biggest banks.
The full PMI report, compiled by British research firm Markit, also highlighted the following findings:
- Factories surveyed said demand was muted for both domestic and foreign markets. Demand was especially weak in Europe and North America.
- Around 15 percent of factories polled said new export business fell in June, compared to 6 percent of respondents who said business improved.
- Inventories of finished goods rose, and anecdotal evidence suggested the increase was a result of unexpectedly weak sales. Inventories rose at their second-fastest rate since records began in April 2004, although the survey said the speed of increase was still modest.
- Falling commodity and crude oil prices dragged input prices down to their second-lowest level on record, behind all-time lows seen during the 2008/09 crisis.
- Slackening demand for raw materials improved the delivery times of suppliers.
- Purchases of raw materials fell due to weak demand, and as factories tried to run down their stocks.