Chinese manufacturing sector shrank more than expected in July

A widely followed leading indicator for the Chinese economy surprised sharply to the downside, suggesting risks for the economy still existed.

The Markit purchasing managers' index for July dropped to a reading of 48.2- a 15-month low - following a print of 49.4 for the month before.

That was far below the consensus forecast for a reading of 49.7.

"Today’s PMI reading suggests that the improvement in momentum seen at the end of Q2 may not have extended into the start of Q3 and that downside risks to growth remain," wrote Julian Evans Pritchard at Capital Economics.

"Despite the much weaker-than-expected PMI reading, we remain relatively sanguine about the near-term outlook. We think that recent policy easing has yet to fully feed through into stronger economic activity and expect policy-makers to respond to signs of weakness by stepping up support in order to prevent growth from slipping much further this year."

"Today's survey data will add to heightened concerns over the extent of the current growth slowdown. We expect additional policy action in the months ahead, including interest rate cuts and further reductions in the reserve requirement ratio. However, thanks to an ongoing appreciation in China's real effective exchange rate, monetary policy conditions will remain tight. This could see the authorities turning to a more direct approach such as fiscal spending, although this in itself has its own risks," Oxford Economics said in a research note e-mailed to clients.