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Survey confirms China manufacturing at 6-month low in latest sign of No. 2 economy's slowdown

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HONG KONG - Chinese manufacturing shrank this month for the first time in half a year, a survey of factory purchasing managers confirmed on Thursday.

The HSBC survey backs up a preliminary version earlier this month that unsettled global investors by raising fears the world's No. 2 economy is slowing.

The purchasing managers' index fell to 49.5 from 50.5 in December, on a 100-point scale on which readings above 50 indicate growth. January's level was the lowest since July.

The index "signalled a deterioration of business conditions" in China's huge manufacturing industry, with weakness in factory output and new business, HSBC said.

The reading was lower than 49.6 in the early version released last week that combined with several other big economic worries led to several days of sharp declines on world stock markets.

HSBC's chief China economist, Qu Hongbin, said it was "a soft start to China's manufacturing sectors in 2014, partly due to weaker new export orders and slower domestic business activities during January."

"Policy makers should pay attention to downside risks and preemptively fine-tune policy to steady the pace of growth if needed," he said.

HSBC and Markit Economics surveyed 420 companies for the index. More data on China's factories is expected on Saturday when an official group releases a separate PMI covering 3,000 companies.

The latest data highlights the challenged Beijing faces in trying to refocus the economy, which grew 7.7 per cent last year. While that is far ahead of advanced economies, it's slower than the double-digit rates of the past decade. An unexpectedly sharp decline raises the risk of politically dangerous job losses and will test the ruling Communist Party as it tries to shift the basis of the economy to domestic consumption rather than trade and investment.

Julian Evans-Pritchard, assistant economist at Capital Economics in Singapore, cautioned against reading too much into the report because the data could be distorted by the Lunar New Year holiday, which starts on Friday this year. Chinese factories typically shut down around the time of the holiday as workers go home to visit families, leaving fewer work days.

"Year-to-year shifts in the timing of Chinese New Year make seasonal adjustment less accurate. Nonetheless, such a large drop suggests that activity in the manufacturing sector has cooled," Evans-Pritchard said in a report.

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Follow Kelvin Chan at twitter.com/chanman.

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