* Factory activity surveys signal further economic weakness
* Private surveys show downturn worst felt by small firms
* More stimulus measures seen in coming months (Combines official and private surveys, adds quotes)
By Xiaoyi Shao and Kevin Yao
BEIJING, Oct 1 (Reuters) - Activity in China’s vast factory sector shrank again in September as demand softened at home and abroad, fueling fears that the world’s second-largest economy may be cooling more rapidly than expected just a few months ago.
Similar private surveys also showed growing strains on smaller and medium-sized manufacturing and service companies which are at the heart of China’s economy, providing most of its jobs and 60 percent of its gross domestic product.
The weak readings add to fears that a steady stream of stimulus measures has been unable to keep growth from slipping below 7 percent in the third quarter, which would be the weakest level since the global crisis and put more pressure on jittery financial markets.
Activity at larger, state factories shrank for a second straight month, albeit at a slower pace than in August, while smaller manufacturers reported the worst conditions in 6-1/2 years and falling export orders pointed to more pain ahead.
“Two straight months of manufacturing sector contraction with a depressed equity market suggests China’s third-quarter GDP growth is likely to have slowed to 6.4 percent,” economists at ANZ said.
A summer stock market crash and China’s surprise devaluation of its currency in August sent shockwaves through global markets, raising concerns both inside and outside of China about Beijing’s ability to manage its economy.
Still, there were no signs in the latest surveys that the economy is facing the worst-case scenario of a hard landing, and ANZ believes that growth could pick up again later in the year as stimulus measures and higher government spending gradually take effect.
The official manufacturing Purchasing Managers’ Index (PMI) inched up to 49.8 in September from the previous month’s reading of 49.7, but still suggested conditions were deteriorating.
A private survey by Caixin/Markit focusing on small factories pointed to an even sharper cooldown, with the PMI shrinking to 47.2, the lowest since March 2009. Readings below 50 signal a contraction.
“The two PMIs taken together still point to subdued activity in the manufacturing sector,” said Julian Evans-Pritchard, economist at Capital Economics.
Financial services firm Markit said later on Thursday that it would discontinue its preliminary reading on China factory activity, though it would still issue a final report. Many global investors have relied on the “flash” estimates for their first glimpse of business conditions in China for the month.
LABOUR MARKET KEY TO BEIJING‘S RESPONSE?
Both the official and private surveys showed manufacturers shed more jobs last month as sales weakened and new export orders continued to contract.
The health of the labour market could be key in determining how much more stimulus authorities will deploy in coming months. Many economists see further cuts in interest rates and bank reserve requirements this year.
Regulators on Wednesday cut downpayment requirements again for first-time home buyers as they look to reduce the ailing property market’s drag on the broader economy. It was the second measure in two days to fire up consumption, following a government decision to halve the sales tax on small cars.
Tens of millions of Chinese were thrown out of work during the global crisis, alarming the stability-obsessed Communist Party. The current downturn has not produced evidence of mass layoffs so far, though tales abound of “zombie” factories keeping workers on payrolls at subsistence wages.
Perhaps more concerning for the government and investors were growing signs of stress in China’s services sector, which now accounts for nearly half of GDP.
The services industry has been the lone bright spot for the economy in the last few years, helping to cushion a prolonged downturn in the factory sector and investment, but it too has begun to show signs of fatigue in recent months as consumers grow more cautious.
While larger services firms continued to expand at a fairly solid clip of 53.4 in September, growth for their smaller peers came close to stalling, official and private surveys showed.
Indeed, the Caixin surveys suggested service sector growth is no longer strong enough to compensate for the growing downdraft from weak manufacturing and investment.
A composite PMI covering both manufacturing and services shrank for the second month in September and at a sharper rate.
The government is due to release third-quarter GDP data on Oct 19.
Many market watchers suspect current growth is already much weaker than official data suggest, pointing to weak electricity usage, sluggish freight volumes and the growing number of mmultinational firms such as Caterpillar and General Motors reporting flagging China sales. (Additional reporting By Winni Zhou; Editing by Kim Coghill)