UPDATE 3-China June PMI hits 28-mth low as global slowdown bites

* Official PMI falls to 50.9 in June from May's 52

* Growth easing on weak global demand, policy tightening

* Further weakening in new order, export order growth

* Factory prices still rising but at slower rate

* Inflation still elevated, no major policy loosening seen

(Adds more detail on orders)

By Kevin Yao and Xin Zhou

BEIJING, July 1 (Reuters) - China's factory sector grew at
its slowest pace in 28 months in June as new orders expanded
less quickly, with weaker global demand and tight monetary
policy at home pinching production.

Although the moderation in activity did not point to a sharp
drop-off in Chinese economic growth for now, the data was
slightly worse than forecast and led some analysts to predict
China may be less aggressive in tightening monetary policy
conditions later this year.

Some market watchers said Beijing could even take selective
steps to tackle pressing bottlenecks, such as freeing up more
credit to cash-strapped firms.

"This will further depress markets which have been
increasingly worried about a hard landing in China," said Ting
Lu, an economist at Bank of America-Merrill Lynch in Hong Kong,
while arguing that China was more likely facing a soft landing.

"Some policymakers might be more concerned about
over-tightening and might consider slightly adjusting their
policy stance," he said. For example, he added, some additional
increases in banks' reserve ratios (RRR) that have been expected
may be put on hold.

The official purchasing managers' index (PMI), designed to
provide a snapshot of conditions in China's vast manufacturing
sector, fell to 50.9 in June, below expectations for a reading
of 51.3 and down from 52 in May, the China Federation of
Logistics and Purchasing said on Friday. The 50-point level
demarcates expansion from contractions.

A separate PMI survey by HSBC showed growth in overall
factory production came close to stalling in June, confirming
preliminary findings released last week. Its PMI reading stood
at 50.1, with output falling for the first time since July 2010
amid lacklustre demand and power shortages.

With the U.S. economy sputtering and Europe fighting a debt
crisis, global investors are especially sensitive to any wobble
in activity in China, a bastion of fast growth.

London copper prices fell about 0.6 percent in Asian
trade on Friday after the China data, but Asian stock markets
were higher, hoping that an unexpectedly strong pick-up in
business activity in the U.S. Midwest signalled its economy was
powering through its recent soft patch.

In a sign that China is not insulated from the troubles of
its major trade partners, the official sub-index for new export
orders in the PMI fell to 50.5 in June from 51.1 in May,
reflecting persistent weakness in global demand. Backlogs of
orders shrank for a second straight month.

U.S. retailers are planning conservatively for the upcoming
holiday season, trying to avoid being stuck with a pile of
unsold goods as they were last season, retail executives told a
Reuters consumer summit last week. [IDnN1E75R0J6]

WHAT IMPACT WILL THERE BE ON POLICY?

The official PMI showed new orders and exports orders were
still growing, though at a much slower pace than May, while the
HSBC PMI indicated new export orders fell for a second straight
month.

Chen Xingdong, an economist at BNP Paribas, said the current
trend in PMI suggests that China's overall economic growth could
be dipping towards 8 percent, a level that is likely too low for
the government to stomach as it may not create enough new jobs.

As such, Chen said he expects Beijing to "modify" China's
tight monetary conditions by giving small- and medium-sized
enterprises more access to cash.

He noted the Beijing is already trying to loosen credit
controls a touch by allowing the finance ministry to sell bonds
on behalf of a handful of local governments to support the
building of government-subsidised homes.

"If growth decelerates and you don't stop it, it would be
like a ball rolling off a slope and its speed would pick up," he
said.

But Dongming Xie, an economist at OCBC Bank in Singapore,
noted inflation remained a more immediate worry for Beijing.

"I think it is too early to talk about loosing policy based
on the current growth number as inflation is still a concern in
the near term," Xie said.

"Economic growth is slowing, but only at a moderate pace."

INFLATION COOLING BUT SLOWLY

The People's Bank of China, keen to put a lid on price
rises, has lifted the reserve requirement ratio for banks nine
times and raised interest rates four times since October.

Inflation raced to 34-month highs of 5.5 percent in the year
to May, and is expected to quicken further to 6 percent in June
or July.

But as China's economic growth eases slightly, leading
indicators suggest price pressures may be moderating, too.

The official PMI showed factory input prices continued to
rise sharply in June, albeit at a slower rate than in May,
though cooling demand may prevent manufacturers from passing all
of those price rises through to consumers in the near term.

Still, not all economists were convinced Beijing is ready to
relax policy just yet since it is perennially worried that high
prices could stir social unrest and threaten its leadership.

Official rhetoric from Beijing suggests its focus is still
very much on taming price pressures.

Earlier this week, Premier Wen Jiabao signalled for the
first time that China would struggle to meet its 4 percent 2011
inflation target, underlining expectations that interest rates
will rise further even as economic growth slows. 

"The government can claim some progress with inflation, but
China is also enjoying the pull-back in global commodity
prices," said David Cohen, an economist at Action Economics.

"I think they like to take it gradually on policy, and we
can still look for a couple more interest rate hikes before the
end of the year."

(Reporting by Zhou Xin and Kevin Yao; Editing by Don Durfee &
Kim Coghill)