China September factory growth slows amid trade tensions

BEIJING (Reuters) - Growth in China's manufacturing sector cooled more sharply than expected in September, suggesting U.S. trade tariffs are starting to deal a heavier blow to the world's second-largest economy.

The official Purchasing Managers' Index (PMI), released by the National Bureau of Statistics on Sunday, fell to a 7-month low of 50.8 in September from 51.3 in August, but remained above the 50-point mark that separates growth from contraction for the 26th straight month.

Analysts surveyed by Reuters had forecast the reading would ease to 51.2.

New export orders, an indicator of future activity, contracted for a fourth straight month, with the sub-index falling to 48.0 from 49.4 in August.

The United States and China imposed fresh tariffs on each other's goods on Sept. 24, the latest escalation in a protracted trade dispute between the world's two largest economies.

Washington has threatened even more sweeping measures which would tax virtually all of the goods that China sells to the United States.

While China's official export data has proved surprisingly resilient so far, many analysts believe companies have been rushing out shipments to the United States to beat successive rounds of tariffs, raising the risk of a sharp drop off once duties are actually imposed. The deepening slump in export orders may be bearing that theory out.

Export-reliant Chinese cities and provinces are already showing the strain. Guangdong, China's biggest province by gross domestic product, reported a drop in exports in the first eight months from a year earlier.

Demand in China had already been slowing before the U.S. trade row flared, as a multi-year crackdown on riskier lending and debt started to push up companies' borrowing costs. Fixed-asset investment growth has sunk to a record low.

Policymakers have shifted focus in recent months to growth boosting measures to cushion the economy and weather the trade storm. They have sought to bring financing costs down, boost lending to smaller businesses, cut taxes and fast-track more infrastructure projects.

But analysts note it will take some time for such measures to put a floor under the slowing economy, with some predicting things will get worse before they get better.

The sub-index on imports, viewed as a proxy for domestic demand, remained in contraction territory in September at 48.5 after logging at least one year low in August. A production sub-index fell to 53.0 in September from 53.3 in August, while a new orders sub-index declined to 52.0 from 52.2.

A sister survey released by the NBS on Sunday showed growth in China's service sector picked up in September, with the official non-manufacturing Purchasing Managers' Index (PMI) rising to 54.9 from 54.2 the previous month.

The pick up will offer some cushioning for the slowing economy as the services sector accounts for more than half of China's economy, with rising wages giving consumers more spending power.

(Reporting by Lusha Zhang and Kevin Yao; Editing by Michael Perry)