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China manufacturing slowdown ripples through region

By Wayne Cole

SYDNEY (Reuters) - Growth in China's vast factory sector slackened in August as foreign and domestic demand slowed, stoking speculation that further policy easing would be needed to prevent the economy from stumbling once more.

The surveys of purchasing managers (PMI) from across Asia told a tale of underwhelming new orders and faltering exports, overshadowing brighter spots such as India and Taiwan.

That was a taster for a feast of euro zone PMIs due later Monday where any weakness would only add to pressure on the European Central Bank to at least open the door to more monetary stimulus at its policy meeting this week.

The Chinese surveys come in both official and private sector flavors. The National Bureau of Statistic's version fell from a 27-month high to 51.1 in August, as factories shed jobs for at least the 24th consecutive month.

More worrying was the HSBC/Markit PMI, which eased to 50.2 in August, only a whisker above the 50-point mark that separates expansion from contraction.

The official survey showed falls across output, employment, new orders, delivery time and raw material inventory, while the private version highlighted subdued demand.

"The economy is healthier than it was in early 2014, but the recovery is tepid and patchy, with housing weakness a weighty anchor on both activity and confidence," said Huw McKay, a senior international economist at Westpac in Sydney.

"The authorities would be wise to stay the course with easier policy settings, especially on the fiscal side."

GOOD AND BAD

The lull in Chinese demand is rippling across the region.

South Korea reported exports to China fell in August for a fourth consecutive month on-year, the longest such losing streak in two years, taking some of the shine off a continued recovery in shipments to the United States and the European Union.

Exports overall dipped 0.1 percent in the month, underscoring a tentative recovery for Asia's fourth-largest economy and leaving the door open for another rate cut before year-end.

"Today's trade data should reinforce the government's cautious view on growth," said Raymond Yeung, senior economist at ANZ bank, adding that another rate cut by the Bank of Korea before year-end remains a distinct possibility.

Indonesia's version of the PMI, from HSBC/Markit, showed activity there contracted for the first time in a year in August, weakened by declining new orders and production.

In Japan, the flow of data has shown the economy still suffering the baleful effects of a sales tax hike in April.

Wild swings in consumer spending saw the economy shrink an annualized 6.8 percent in the second quarter, more than erasing the previous quarter's 6.1 percent gain.

VIRTUOUS CYCLE ENDING?

Firms reacted by trimming investment by a seasonally adjusted 1.8 percent in the second quarter, so threatening to end the virtuous cycle of production boosting wages, household income and spending.

Yet there was modestly promising news on industrial activity for August. The final Markit/JMMA Japan Manufacturing PMI held at a relatively firm 52.2 in August, up from 50.5 in July.

Also encouraging was activity in Taiwan, which continues to benefit mightily from being a key cog in Apple's supply chain.

Taiwan's manufacturers enjoyed the strongest expansion of new orders in over three-and-a-half years, much of it for export, lifting the PMI to a lofty 56.1 in August.

India was another standout as its PMI eased a touch to 52.4 in August but chalked up the tenth straight month of expansion. The country surprised last week by reporting economic growth quickened to an annual 5.7 percent in the second quarter.

"Output and new orders slowed slightly in August, but remained robust relative to their 12-month history," said Frederic Neumann, co-head of Asian economic research at HSBC.

"The mood remains positive too, with firms accumulating inventory in response to stronger demand," he added.

(Reporting by Koh Gui Qing in BEIJING; Editing by Richard Borsuk)

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