UPDATE 2-China economy fears deepen as August HSBC flash PMI at 3-month low
* China Aug factory activity slowed to 3-month low
* New orders and output sub-indices cooled
* Survey adds to concerns about softness in economy
* More steps may be needed to keep growth momentum (Adds comments)
By Xiaoyi Shao and Gui Qing Koh
BEIJING, Aug 21 (Reuters) - Growth in China's vast factory sector slowed to a three-month low in August as output and new orders moderated, a preliminary private survey showed on Thursday, heightening concerns about increasing softness in the economy.
The tepid reading came as China's economic growth appears to be faltering again, with recent indicators ranging from lending to output and investment all pointing to weakness.
With conditions looking increasingly unsteady, analysts say more stimulus may be needed in coming months to bolster growth and offset the downdraft from the cooling housing market.
The HSBC/Markit Flash China Manufacturing Purchasing Managers' Index (PMI) fell to 50.3 from July's 18-month high of 51.7, missing a Reuters forecast of 51.5.
It was the lowest reading since May, though the PMI stayed above the 50-point level that separates growth in activity from contraction for a third consecutive month.
"Today's data suggest that the economic recovery is still continuing but its momentum has slowed again," said Hongbin Qu, chief economist for China at HSBC.
"We think more policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity," Qu said.
Losses for most Asian stock markets, including Hong Kong and China, deepened after the PMI survey while the Australian dollar fell. Australia is sensitive to news out of China, its key export market.
A HSBC/Markit sub-index measuring new orders, a gauge of demand at home and abroad, fell to a three-month low of 51.3. The sub-index for output also dropped to a three-month low in August.
MORE MEASURES EXPECTED
"Definitely there will be more measures to keep growth momentum steady in coming months," said Zhu Qibing, economist at Minzu Securities in Beijing. "But we don't expect interest rate cuts in the near term as the central bank has reiterated that it would keep its prudent monetary policy unchanged."
Wang Tao, China economist at UBS, said in a note to clients on Thursday that continued policy support, improved external demand plus new measures "should keep growth momentum relatively firm through September".
"The positive impact of still accommodative liquidity conditions, faster fiscal spending, and additional policy support, including intensified support for social housing and more widespread relaxation of local property restrictions, will still likely be felt in the next few months," Wang said.
Chen Dongqi, a researcher at a government think-tank affiliated to China's top economic planner, the National Development and Reform Commission, said this month China should loosen monetary policy further through "modest" cuts in bank lending rates and reserve requirements.
China's cabinet pledged on Wednesday that it will lower taxes for high-tech companies and cutting red tape in its latest bid to help businesses operate.
The PMI survey also showed employment fell at a faster pace than in July, indicating more layoffs in the manufacturing sector which could begin to erode consumer confidence.
Any marked weakening in the labour market would raise alarm bells for China's leaders, who regard healthy employment levels as a top policy priority and an important condition for social stability.
A slowdown in the property market appears to be deepening, chilling activity in related sectors, while some economists fear banks may be increasingly reluctant to extend credit, particularly to private companies, as bad loans continue to rise and asset quality deteriorates.
The Bank of China Ltd , the country's fourth-largest lender by market value, earlier this week reported slowing profit growth and said it could see more loans go bad in the second-half of the year as growth in the export sector founder.
Still, a Reuters poll in July showed analysts were divided over whether China would cut the reserve requirement (RRR) in coming months in a bid to free up more funds for banks to lend.
Half of the economists surveyed thought the RRR would be reduced by 50 basis points to 19.5 percent between October and March, and a vast majority thought interest rates would remain unchanged.
In a bid to re-invigorate the economy, China has relaxed monetary policy since April by easing controls in the property market, accelerating the construction of some infrastructure works, and relaxing reserve requirements for small banks to boost lending.
Some economists worry there is already more money in the system than it can digest and any new injections would flow directly into speculation, not the real economy, a view echoed by the central bank in recent statements.
In the past, a typical RRR cut by the PBOC was usually 50 basis points, and it would pump about 550 billion yuan (89.41 billion US dollar) base money into China's monetary base. (1 US dollar = 6.1511 Chinese yuan)
(Additional reporting by Pete Sweeney; Editing by Kim Coghill and Richard Borsuk)