China's factory sector shrank the most in 32 months in November as new orders slumped, a preliminary PMI survey showed, reviving worries that China may be skidding towards an economic hard landing and fuelling global recession fears.
The steep fall in the HSBC flash purchasing managers' index (PMI) to 48 in November from 51 in October underscores Beijing's growing alarm over the health of the global economy and unnerved financial markets already roiled by the euro zone debt crisis.
The data is likely to boost expectations Beijing may soon shift its policy focus from supporting selective parts of the economy to broader measures, such as reducing bank reserve requirements nationwide or providing fiscal stimulus.
"Worse is yet to come," said Conita Hung, head of equity research of Delta Asia Financial Group. "Companies involved in shipping, exports and even banking and finance will be affected."
The Australian dollar fell to a six-week low after the PMI report, on concern that demand growth from Australia's biggest trading partner and export market will ease.
Oil prices also eased on demand worries.
US S&P stock futures extended losses to more than 1 per cent as the China data added to concerns about faltering global growth. A sharp downward revision to US third-quarter growth figures on Tuesday had already put the market under pressure.
November's flash PMI reading is the lowest since March 2009 and suggests the factory sector contracted during the month. A PMI reading of 50 demarcates expansion from contraction.
Qu Hongbin, an economist at HSBC, said the PMI data suggested industrial output growth in China, often referred to as the world's factory floor, will slide. Output has averaged close to 14 per cent this year.
"Industrial production growth is likely to slow further to 11-12 per cent year-on-year in coming months as domestic demand cools and external demand is set to weaken," Qu said.
The output sub-index tumbled to a 32-month low of 46.7, a steep drop from October's final reading of 51.4.
Factory inflation cooled sharply. The sub-indexes for input and output prices dropped around 10 points each to below 50 to lows last seen in April 2009.
New export orders held above 50 but overall new orders suffered the biggest drop in 1-1/2 years to sink well below the 50-point mark, suggesting factories received fewer orders on the whole in November even though orders from overseas held up.
The flash PMI is based on up to 90 per cent of total responses to the monthly survey and is a snapshot of the final data.
Still A Soft Landing?
Beijing is bracing for a slowdown in the economy, which has averaged growth of more than 10 per cent for a decade.
Vice Premier Wang Qishan said at the weekend that a "chronic" global recession was "certain", the most dire reading from a senior Chinese policymaker to date.
China's growth would slip to 9.0 per cent in 2011 and then further to 8.4 per cent in 2012, the World Bank said in a report on Tuesday, adding that "the risks are tilted to the downside."
In a nod to the slowdown, Beijing has adopted a "fine tuning" policy of selective measures to help private-sector firms.
In the latest move to encourage a supply of credit to the sector, the central bank cut reserve requirements for five rural banks in eastern Zhejiang province -- a cradle of private enterprise -- sources with knowledge of the matter said.
China's official PMI, published by Beijing, tilts towards large state firms, while the HSBC survey is skewed towards private companies.
The next policy step may be broader measures to prevent a severe downturn, said Tony Tong, a strategist at Everbright Group in Hong Kong.
"A hard landing is unlikely to be seen as we also expect the government will adjust its policy to enhance a soft landing," he said.
Growth in Chinese exports hit eight-month lows in October as manufacturing output grew at its weakest in a year. The exuberant Chinese property market is also coming off the boil to drag on real estate construction and investment.
HSBC's Qu argued China would stick with a policy of selective measures for now to support the economy.
"As inflation is likely to decelerate at a faster-than-expected pace, it will leave more room for Beijing to step up selective easing measures, which should gradually filter through to keep China on track for a soft-landing," he said.
Inflation eased to 5.5 per cent in October, down from three-year peaks of 6.5 per cent struck in July.