China manufacturing activity contracted the most in two years in a sign that the economy could be losing more steam.

 

Caixin China General Manufacturing Purchasing Managers’ Index (PMI) – a measure of nationwide economic activity –  fell to 47.8 in July from 49.4 in June and remained below the neutral 50 mark for the fifth successive month.

 

New orders fell to the weakest level since March 2014. Output fell to the weakest level since November 2011, while stocks of finished goods rose to a seven-month high.

 

“The official PMI was also weaker than expected for the month of July, suggesting that the manufacturing sector may again be losing momentum,” comment Julia Wang, economist, Greater China and Qu Hongbin, co-head Asian economy research at HSBC in a note to clients.

 

Analysts expect both monetary and fiscal policies to be more supportive in the coming months. HSBC forecasts another 25bps policy rate cut and 200bps reserve ratio cut in the second half of the year.

 

“The State Council held a meeting last week, pledging more urbanization-related investment, financed by a mix of municipal bonds, bank lending, and financial bonds issued by policy banks. The combination of both monetary and fiscal easing measures should help strengthen the recovery in 3Q 2015,” HSBC notes.