June 1, 2017 / 7:09 AM / 3 months ago

China stocks fall on weaker factory activity survey

SHANGHAI, June 1 (Reuters) - China stocks started the month on a bearish note on Thursday after a private business survey showed manufacturing activity unexpectedly contracted in May, fuelling worries that the economy may be cooling more rapidly than expected.

The blue-chip CSI300 index finished 0.1 percent higher at 3,497.74 points, while the Shanghai Composite Index lost 0.5 percent to 3,102.62 points.

Small-cap stocks led the market's decline, with the closely-watched start-up board ChiNext slumping 2 percent to the lowest closing level in nearly 28 months.

Sentiment was hit by the gloomy Caixin/Markit Manufacturing Purchasing Managers' index (PMI), which contrasted sharply with official readings on Wednesday that suggested a modest but steady pace of growth from the previous month.

The index fell to 49.6, weaker than expected and below the 50-point mark which demarcates growth and contraction. The reading fell for the third month in a row.

The fall in the Caixin index appears "consistent with the recent decline in the price of industrial metals" and is "consistent with our broader outlook on the Chinese economy," said Julian Evans-Pritchard, China Economist at Capital Economics, in a research report.

"After all, we have long been warning that the rebound in growth during the second half of last year would prove short-lived."

The upbeat mood of the previous session - triggered by regulators' share sale restrictions - also evaporated, as worries deepened about excessive government intervention.

Chen Xi, a strategist at Dongguan Securities, said regulators' tougher restrictions on share sales, which were intended to stabilise the market, could backfire, as "capital would think twice before entering the stock market".

That could hurt stock valuations, especially for small caps.

For the day, material stocks dragged the most among main sectors, echoing an across-the-board correction in the commodities market after the Caixin survey. (Reporting by Luoyan Liu and John Ruwitch; Editing by Kim Coghill)

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