(Fixes typo and missing word in lead paragraph)
* The HSBC/Markit flash China PMI hits 3-month low in Aug
* Signals fragility in China economy, more policy steps
* Japan PMI shows manufacturing accelerated in Aug
* Flash PMIs expected to cool in Europe but stay strong in
By Xiaoyi Shao and Tetsushi Kajimoto
BEIJING/TOKYO, Aug 21 China's manufacturing
activity hit a three-month low in August, raising the case for
fresh policy steps to keep growth on track, while a Reuters poll
showed Japan's economic recovery is likely to be modest despite
a small acceleration in the factory sector.
Surveys conducted by HSBC/Markit and Reuters highlighted
fragility in recovery of the world's second- and third-largest
economies at a time when policymakers try to walk a fine line
between supporting growth and pushing structural changes.
The HSBC/Markit Flash China Manufacturing Purchasing
Managers' Index (PMI) fell to 50.3 in August from July's
18-month high of 51.7, badly missing a Reuters forecast of 51.5
but still hovering above the 50 threshold that separates
expansion from contraction.
"The sharp drop in the PMI is perhaps not surprising given
last month's disappointing activity and lending data. That said,
we are not expecting a rapid deterioration in economic
momentum," Julian Evans-Pritchard, China economist at Capital
Economics, wrote in a note.
"Meanwhile, we expect the government to continue to fine
tune policy as necessary to prevent growth from slipping too
much over the coming quarters."
Most Asian stock markets, including Hong Kong and China,
extended early losses after the PMI survey while the Australian
dollar, often used as a liquid proxy for bets on China,
A burst of policy stimulus steps since April lifted China's
annual economic growth to 7.5 percent in the second quarter - in
line with the full-year official growth target - from 7.4
percent in the first quarter - the weakest pace in 18 months.
But with conditions looking increasingly unsteady into the
third quarter as policy support moderated, some analysts say
even more stimulus may be needed in coming months to bolster
growth and offset the downdraft from the housing market.
A sharp drop in bank lending and fiscal spending in July
underscored fear that banks may be increasingly reluctant to
extend credit, particularly to private companies, as bad loans
continue to rise and asset quality deteriorates.
More policy steps may be needed, but analysts also caution
against high expectations given that China's reform-minded
leaders have shown greater tolerance for slower growth and ruled
out large-scale policy stimulus.
"Definitely there will be more measures to keep growth
momentum steady in coming months," said Zhu Qibing, an 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."
An abrupt drop in credit in July has strengthened the case
for rate cuts, but policy insiders believe it will be reluctant
to take more aggressive steps and for now will stick with more
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.
MODEST RECOVERY IN JAPAN
A similar survey on Japan showed factory activity
accelerated in August as export and domestic demand increased,
in another sign the economy is steadying after shrinking in the
second quarter due to a sales tax increase. But a Reuters Tankan
poll indicated the economic recovery is likely to be modest,
which could keep pressure on the central bank to act to sustain
growth in the world's third largest economy.
The Markit/JMMA flash Japan PMI jumped to a seasonally
adjusted 52.4, up from 50.5 in July and the highest reading
since March, just before a hike in taxes throttled demand.
Separately, the Reuters Tantan poll showed confidence at
Japanese manufacturers inched up in August to mark the first
improvement since April, but the service sector's mood soured
for the second straight month, reflecting a tame economic
recovery from April's sales tax rise.
Data on Wednesday showed Japan's exports rose in July for
the first time in three months in a tentative sign that global
demand is starting to recover, raising hopes that exports can
offset sluggish consumer spending.
Japan's economy shrank an annualised 6.8 percent in
April-June, its biggest slump since the March 2011 earthquake,
stoking fears that consumer spending had weakened more than
expected due to the April tax hike.
While a bounce was expected in the second half of the year
as the impact of the tax increases fades and consumers start
buying again, the plunge in GDP and uncertain export outlook
have cast doubt on the strength of such a recovery.
Flash PMIs from the eurozone later in the day are expected
to show a similar cooling trend, with factory and service sector
activity still expanding but at a slower rate. Germany's economy
shrank in the second quarter and France again failed to conjure
up any growth, snuffing out any signs of a recovery in the euro
zone which is now also weighed down by tit-for-tat sanctions
A similar survey for U.S. manufacturing is expected to show
continued strong expansion, which could add to speculation on
when the U.S. central bank will begin raising interest rates.
Most economists do not expect that to happen until mid-2015
given still sluggish wage growth and tame inflation.
(Writing by Kevin Yao; Editing by Simon Cameron-Moore)