Caixin China PMI in surprise drop to 2-year low

ChinaFotoPress | Getty Images. A key China economic indicator showed the downturn in manufacturing intensified in July, with the Caixin China PMI surprising with a drop to a two-year low.

A key China economic indicator took a sharp turn for the worse, with the final reading for the Caixin China purchasing managers' index (PMI) for July surprising with a drop to a two-year low.

"The downturn in China's manufacturing sector intensified at the start of the third quarter. Renewed falls in both total new work and new export orders led manufacturers to cut production at the fastest rate since November 2011," the news release said.

The reading came in at 47.8, well below the 50-mark separating growth from contraction and also lower than the preliminary reading of 48.2, which also surprised markets on the downside. The data paint a darker picture than the official China PMI, released on Saturday, which avoided falling into contraction territory by coming in at 50 for July, down from June's 50.2 and below a Reuters poll forecast for 50.2.

Caixin's China PMI data tends to focus on smaller and medium-sized companies, filling a niche that isn't covered by the official data.

"The weakness of numbers like the PMI does suggest that [the China economy] is having a very hard time turning around," Donna Kwok, senior China economist at UBS, told CNBC. "This isn't a terrible thing though, if you put the two numbers together, today's numbers with the weekend [official PMI]. Services are holding up and at least the biggest employers, the big SOEs (state-owned enterprises) are holding up," she added.

"I wouldn't say that we're bullish on the economy by any means. But we do think the PMI is only one of many indicators," Kwok said, noting that power generation stabilized in July. She also expects infrastructure investment held up in July as well. "For the next month, we are expecting to see the economy stabilizing on the low levels."

After the data, the Australian dollar (Exchange: AUD=) eased to as low as $0.7287, from $0.7308 prior to the data release, although it later recovered some ground. Although it initially held steady, China's Shanghai Composite (Shanghai Stock Exchange: .SSEC) index retraced some of its earlier 1.9 percent drop to trade down around 0.8 percent.

China's economic data have been painting a mixed picture recently. Quarterly gross domestic product (GDP) data released last month beat forecasts by showing 7.0 percent growth, renewing long-standing concerns over data accuracy.

Read More Making sense of a wild ride for the Chinese economy

Concerns about slowing economic growth on the mainland have spurred policy makers to action. Late last month the People's Bank of China (PBOC) cut interest rates and the reserve requirement ratio (RRR) for some lenders in a bigger-than-expected easing package. That marked the PBOC's fourth round of major action since November amid concerns that the government's annual GDP target of "around 7 percent" could be at risk. China last cut both interest rates and the RRR at the same time in December 2008, at the peak of the global financial crisis.


-By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1



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