China's flash manufacturing index crashed to nine-month low

Blame the 47.9 index point on weak export orders and nasty output index.

According to Barclays, in contrast to expectations of a modest seasonal pickup in August, the HSBC flash manufacturing PMI fell to a nine-month low of 47.9. The biggest drags came from 1) new export orders, which fell to 44.7, the worst since March 2009; and 2) the output index, which dropped to a five-month low of 47.9.

Here's more from Barclays:

It should be noted that the HSBC PMI is more tilted to export-oriented smaller enterprises. Thus, rapidly weakening external demand, as clearly evidenced in the 1%y/y export growth in July, has been showing a more visible impact on the HSBC PMI output index. We think the risk of further slowing industrial production growth is increasing, especially given the lack of more effective policy easing since the June-July interest rate cuts. Moreover, both new export orders and new orders contracted at a faster pace in August, evidencing further external headwinds in Q4.

While our view has been that the government has no appetite for announcing a major stimulus or agressive easing, we have also argued in the past month that the worsening external demand in Q3 and the softer-than-expected domestic recovery require more policy support/easing to achieve a 7.5-8% growth target. It has become clear to us that the external growth risks and domestic policy uncertainties have been delaying China's growth recovery and weighing down market sentiment. We think policy inaction or delays may mean a risk of China's full-year growth falling to 7-7.5% in 2012.

That said, we think policymakers are aware of the latest developments. Hence we continue to expect more monetary easing in August-September, in the form of an interest rate cut (to lower financing costs) and an RRR cut (to lower inter-bank market rates), as well as more fiscal support to stablise growth to 7.5-8% in 2012. Export growth and employment conditions are key indicators to watch in the near term, as they may trigger more policy actions on concerns of job losses and social stability..