China's manufacturing activity shrank in March for a fifth successive month, with the overall rate of contraction deepening and new orders sinking to a four-month low, the HSBC flash purchasing managers index showed on Thursday.
The PMI, the earliest indicator of China's industrial activity, fell back to 48.1 from February's four-month high of 49.6. The Australian dollar fell and shares in Hong Kong gave up their gains after the data was released.
Slowing activity serves to reinforce expectations that authorities will further relax monetary policy to help underpin growth in the world's second-biggest economy. Still, lingering inflation risks uncovered by the survey highlight the dilemma facing China's policymakers who are determined to contain price pressures.
The PMI reading is likely to reinforce the more bearish views on China's economic trajectory.
Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authorities, HSBC chief China economist, Qu Hongbin, said in a statement.
An index reading of 50 marks the line between expansion and contraction, according to the methodology of the survey compiled by UK-based data provider, Markit.
But index sponsor HSBC reckons factors unique to the Chinese economy makes 48 especially significant.
The new orders sub-index fell to 46.2, which weighed on the overall index because it is the single biggest of the five component items comprising the PMI.
All five elements signalled a contraction of activity.
Manufacturing output, the second-biggest component of the overall index, slipped back below the 50-point dividing line to hit a two-month low.
New export orders signalled a second straight month of shrinkage, albeit at a slower pace than February.
Backlogs of work shrank to their lowest level since January 2009, near the depths of the global financial crisis as world trade -- a core driver of Chinese economic growth - ground to a halt and Beijing began implementing a 4 trillion yuan (400.138 billion pounds) economic stimulus package.
Of the 11 aspects of business analysed by the survey, only one had not changed on the previous month - input prices were static and pointed to lingering inflation risks.
DEMAND DROUGHT DENTS HIRING
Concerns about a slowdown in the pace of the Chinese economy unsettled global markets earlier this week after BHP Billiton
The Australian dollar fell a third of a U.S. cent to $1.04 on Thursday as the PMI data added to concerns about China's demand for Australia's commodities exports.
The Hang Seng stock index in Hong Kong, which was up 0.7 percent on the day, gave up its gains, while U.S. stock futures edged back. Three-month LME copper turned negative.
External demand remained in contraction territory, but the decline was at a slower pace, implying that there are no improvements in the demand outlook. More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises' hiring desire, HSBC's Qu said.
Data for the flash PMI was collected between March 12-20 and is typically based on approximately 85-90 percent of total PMI survey responses each month.
The HSBC PMI gathers data mainly from smaller, private sector companies while China's official manufacturing PMI, scheduled for release on April 1, captures data from the country's biggest firms.
A Reuters poll earlier this month revealed a consensus call for required reserve ratios (RRR) at the biggest banks to be cut by 150 basis points in 2012 to support money supply and growth. The first 50 bps cut was not forecast until the second quarter.
The RRR was at a record high of 21.5 percent before the central bank called a halt to a near two-year long policy tightening campaign in November, cutting the rate by 50 bps. It followed it with another 50 bps cut in February.
China's economy is expected to return a fifth successive quarter of slowing growth. Analysts anticipate growth will slide towards 8 percent in the first three months of 2012 compared with a year ago, weakening from 8.9 percent in the final quarter of last year.
China's official growth target has been cut to 7.5 percent this year, a pace the government hopes will give it room to deliver on promised structural reforms without causing an inflationary spike. Analysts broadly expect the growth target will be exceeded and few expect a hard landing.
(Reporting by Nick Edwards)