BEIJING Activity in China's factories shrank again in February, a preliminary private survey found on Thursday, reinforcing concerns of a minor slowdown in the economy and spooking markets across the region.
The flash Markit/HSBC Purchasing Managers' Index (PMI) fell to a seven-month low of 48.3 in February from January's final reading of 49.5, where a reading below 50 indicates a contraction while one above shows expansion.
The Lunar New Year festival, which began on January 31 and covered early February, likely affected factory output as manufacturers shut shop for China's biggest annual holiday.
The Shanghai Composite Index .SSEC gave up its early gains on the news, while Asian markets tumbled.
The yield on benchmark 10-year Treasury notes fell to 2.712 percent after the China flash PMI report, compared with Wednesday's U.S. close of 2.734 percent.
The yen, which often gains in line with investors' aversion to risk, got a leg up against its rivals after the China flash PMI report. The dollar's early gains unraveled and it slipped 0.3 percent to 101.97 yen, moving further away from a two-week high of 102.73 yen hit on Tuesday.
The Australian dollar lost nearly half a U.S. cent after the report was released, reflecting China's status as Australia's biggest export market. The New Zealand dollar fell two tenths of a U.S. cent.
"It looks like across-the-board weakness. The indexes should be more correlated with the export economy than the domestic economy," said Stephen Green, an economist with Standard Chartered bank.
"So it's slightly surprising given stronger export numbers we've seen in the last couple of months."
Some analysts cautioned against reading too much into the report, noting that it was a shorter-than-usual snapshot of activity, due to the New Year holiday, and that other indicators have been stronger.
"Macro numbers from national statistics agencies so far painted a mixed picture, with trade growth and credit expansion above market estimates," Ting Lu and Xiaojia Zhi of Bank of America-Merrill Lynch in Hong Kong said in a note.
"At the moment, visibility of short-term growth momentum is quite low."
The PMI's employment sub-index fell for a fourth straight month to 46.9, its lowest point since February 2009, during the global financial crisis.
The jobs sub-index in the PMI is one of the few indicators that measures the health of China's labor market, an area of priority for Beijing which wants to keep unemployment low to maintain social stability.
Other analysts said the weak numbers would encourage the government to loosen monetary policy in order to keep the economy growing at 7.5 percent, a level many in the market believe China will try to achieve this year.
Zhiwei Zhang of Nomura in Hong Kong said he expected a lowering of the required reserve ratio, which sets how much cash a bank must hold against loans, by 50 basis points in the second quarter.
The preliminary February index, which shrank in every category except suppliers' delivery times, showed the new orders sub-index fell below 50 for the first time in seven months, while new export orders were higher than in January, but remained below 50. The index is seasonally adjusted.
The weak China preliminary index for January was believed to be one cause of last month's selloff of emerging market assets.
Aside from seasonal factors, the government's ongoing attempt to restructure the economy away from exports and towards domestic consumption has cooled investment growth - a main engine of China's economy - to its lowest in at least a decade.
Thursday's data is the latest sign of difficulty in China's factories. A series of PMIs in January showed growth in China's manufacturing and services sectors at multi-month or multi-year lows. But those disappointing PMI readings were countered by surprisingly buoyant growth in exports and bank lending, which suggested that the world's No. 2 economy was not faring as badly as some feared.
China's full-year growth for 2013 was 7.7 percent, steady from 2012 and just slightly above market expectations of 7.6 percent, which would have been the slowest since 1999.
The Markit/HSBC PMI is more weighted towards smaller and private companies than the official index, which contains more large and state-owned firms.
The final Markit/HSBC manufacturing PMI for February is due on March 3 and the official manufacturing PMI will be released on March 1.
(Editing by Richard Borsuk and Eric Meijer)