China's factory sector shrank the most in 32 months in November on signs of domestic economic weakness, a preliminary PMI survey showed, reviving worries that China may be slipping toward a hard landing and fuelling fears of a global recession.
The steep fall in the HSBC flash purchasing managers' index (PMI) to 48 in November from 51 in October largely reflected domestic weakness as both output and new orders shrank even as export orders continued to grow.
The flash PMI, the earliest readout of China's industrial activity, was the lowest since March 2009 and suggests the factory sector contracted during the month. A PMI reading of 50 demarcates expansion from contraction.
The PMI unnerved financial markets already roiled by the euro zone debt crisis and a downward revision in U.S. economic growth and underscored expectations that Beijing will lean more on policies to support growth than ones to fight inflation.
They are not going to want this to go too far, said Tim Condon, head of Asia research at ING in Singapore. I'm not sure if it (PMI) is a tipping point but I think it adds to the evidence.
Beijing has already announced some selective steps, geared to small business, to support the economy. HSBC said evidence in the PMI of a sharp drop in inflationary pressures meant Beijing had room for more selective measures if need be.
There remains no need to panic, HSBC economist Qu Hongbin said. Easing inflation provides room for more easing measures, which will keep China on track for a soft landing.
The sub-indexes for input and output prices dropped around 10 points each to below 50 to lows last seen in April 2009.
HSBC 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 and new orders suffered the biggest drop in 1-1/2 years to sink well below 50.
Qu said the PMI data suggested industrial output growth in China will moderate in coming months to an annual rate of 11-12 percent, a pace not seen since 2009 when China was pulling out of the global financial crisis. Output has averaged close to 14 percent this year.
The final PMI reading for November may be slightly higher than the flash number, a comparison of the data shows.
HSBC has reported a flash PMI, which captures up to 90 percent of total responses, since February.
On five occasions, the final PMI reading was higher than the flash reading; twice it was lower and the other two months it was unchanged.
Kevin Lai, senior economist at Daiwa in Hong Kong, said the PMI data showed China's industrial production had started to contract on a month-on-month basis.
We see a 25 percent probability of a hard landing in the first quarter of next year, he said, meaning growth of less than 8 percent.
GLOBAL GROWTH COOLS
The Australian dollar fell to a six-week low after the data on concern that demand growth from Australia's biggest trading partner and export market will ease.
Asia shares outside of Japan dropped more than 2 percent and U.S. S&P stock futures lost further ground as China's PMI added to the risk of a global recession.
A downward revision to U.S. third-quarter growth data on Tuesday had already put markets under pressure.
Vice Premier Wang Qishan is convinced the world is heading into a major downturn, saying at the weekend that a chronic global recession was certain, the most dire reading from a senior Chinese policymaker to date.
Similar flash PMI surveys for the euro zone released later on Wednesday reinforced recession fears by showing the bloc's private sector contracted for a third month in November.
The World Bank forecast on Tuesday that growth in the world's biggest economy after the United States would slip to 9.0 percent in 2011 and then to 8.4 percent in 2012, adding the risks are tilted to the downside.
China's export growth hit an eight-month low in October as industrial output grew at its weakest in a year. Up to a third of Hong Kong's 50,000 or so factories in China could downsize of shut by the end of this year, the Federation of Hong Kong Industries said this month.
The exuberant Chinese property market is also coming off the boil, a factor HSBC said had weighed on the PMI. Average home prices ticked lower in October for the first time this year and property sales fell.
Worse is yet to come, Conita Hung, head of equity research of Delta Asia Financial Group, said after the data. Companies involved in shipping, exports and even banking and finance will be affected.
Most analysts argue that China will keep to a policy Beijing has dubbed fine tuning, under which it offers support to parts of the economy.
These measures have included support for small businesses. In the latest move, the central bank effectively cut reserve requirements for five rural banks in eastern Zhejiang province -- a cradle of private enterprise -- sources with knowledge of the matter said.
Broader measures, such as a rate cut, are not warranted unless the downturn becomes much more serious.
We're not witnessing a collapse yet, said Connie Tse, an economist at Forecast in Singapore. Policymakers are going to rely on selective fine-tuning measures.
BANK RESERVE CUT POSSIBLE
More aggressive policy easing measures are not needed because China's exposure to western demand is less now than it was during the 2008-2009 downturn and its dependence on exports for growth is lower, Qu at HSBC said.
The underlying strength of the industrial sector is also stronger, he suggested.
It's not like 2008, Ting Lu of Bank of America/Merrill Lynch said.
This is not as bad. There's no need for China to be in a hurry to roll out measures. The central bank needs to become more flexible and watch the unfolding crisis. It's not the time for them to change policy stance.
Still, like some other analysts, Condon said the selective measures could spread to broader measures in the months ahead as the economy weakens, so a cut in nationwide bank reserve requirements, currently a record high of 21.5 percent for big banks, may be on the cards within three months.
Wang Hu, an economist of Guotai Junan Securities in Shanghai, agreed but said a bank reserve cut could come by the end of the year.
Chinese policymakers will also be wary of easing policy too quickly for fear of reigniting inflation after a long battle.
Consumer inflation dropped from a three-year high in July of 6.5 percent to 5.5 percent in October, raising hopes the peak has passed.
Inflation risks are still on the radar, said Tse. It'll be premature for the PBOC to loosen on the macro front.
(Additional reporting by Kevin Yao and Langi Chiang in Beijing, Donny Kwok in Hong Kong, Masayuki Kitano in Singapore, Cecile Lefort in Sydney; Writing by Neil Fullick; Editing by Kim Coghill)