China's factory sector shrank by the most in more than two and a half years in November as new orders slumped, a preliminary PMI survey has shown.
The data has revived worries that China may be skidding towards an economic hard landing, fuelling global recession fears and sending Asian stock markets down at the close.
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 Eurozone debt crisis.
“It does highlight the downside risks to the economy. We see downside risks to our below-consensus forecast of 8.4 per cent GDP growth for 2012, mainly from the deterioration in the euro area growth outlook and the ongoing and widespread property market correction in China,” said Barclays Capital analyst Jian Chang.
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."
US S&P stock futures extended losses to more than one per cent as the China data added to concerns about faltering global growth. A sharp downward revision to US third-quarter growth figures 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 percent 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.