Jul. 2 - A key gauge of manufacturing fell to a seven-month low of 50.2 in June, compounding concerns over further slowing of the world's second-largest economy.
The Purchasing Managers' Index registered a second month of decline, down from 50.4 in May, and also hit its lowest level since November, a report on the website of the China Federation of Logistics & Purchasing showed on Sunday.
Any reading below 50 indicates contraction, above expansion.
"The falling index suggests that the economy still faces downward pressure," said Cai Jin, vice-chairman of the federation.
But Cai also said that the fall in the June PMI may be cyclical as June is traditionally lower than May.
And "the extent of the decrease this year is the smallest in years, which means that the economy is building a foundation for stable growth", he said.
Zhang Liqun, researcher with the Research and Development Center at the State Council, also said growth will stabilize.
Other indicators support this, Zhang said, including expanding domestic consumption.
However, there are still many factors hitting production and it will take some time for manufacturing to turn the corner, he said.
A series of sub-indexes suggested that weakening external demand is taking its toll on output.
The New Export Orders index again fell below the critical 50 level to 47.5. Its fall of 2.9 points marked its largest drop since December. However, an output index standing at 52, expanding, indicates that producers have to deal with increasing pressure from inventories piling up.
On top of this, a key gauge of imports, the Inputs Prices Index, declined significantly by 3.6 points, easing inflation pressure but also sounding an alert on possible deflation, the federation report warned.
The downward trend of the official PMI was in line with the HSBC China Flash PMI, which gave an earlier glimpse of domestic output. The HSBC reading at 48.1 also retreated in June, though it reflected an eighth straight month of contraction.
Official PMI data covers 820 enterprises, including State-owned and large enterprises, while HSBC's poll includes around 400 small and medium-sized companies.
Economists estimate that economic growth may plunge below 8 percent in the second quarter on weakening manufacturing activity.
Lian Ping, chief economist at the Bank of Communications, said he expected GDP growth in the second quarter to be around 7.8 percent, and the figure is likely to pick up in the third quarter.
Shen Jianguang, chief economist at Mizuho Securities Asian Co, said the authorities may have to employ more easing measures to offset a faster-than-expected economic slowdown.
In the latest moves to spur investment and growth, the People's Bank of China cut the benchmark interest rate by 25 basis points last month following a reduction of 0.5 percentage point for the bank reserve requirement ratio in May.
Shen predicted that the central bank will cut interest rates again this year, and lower the bank reserve requirement, to inject liquidity due to declining foreign investment and a narrowing trade surplus.
The Consumer Price Index in June, a key gauge of inflation, may fall to 2.3 percent which will allow more room for easing monetary policies, Shen said.
However, Lian said the annual inflation rate may still be above 3 percent and that could rule out more interest rate cuts.
"Economic growth will not see a significant slowdown, as it may take some time for the cut in June to kick in," he said, adding that growth will stay above 8 percent.
Manufacturing sectors involved in transport have seen growth, according to the report, as have sectors involved in real estate.
Pressure has been clearly felt by manufacturers in Wenzhou, an exporting hub.
Zhang Beilei, the owner of Wenzhou Gaotian Shoe Co Ltd said that the number of orders for May was 10 percent lower than the same period last year.
"I guess there is nothing else to do, just to wait and see," he said.
Chen Jianzhong, the chairman of Jiangsu Xiake Color Spinning Co Ltd, said textile and apparel exports had increased by just 0.5 percent in 2011.