BEIJING China's factory sector shrank for an eighth straight month in June as export orders sentiment hit its weakest level since early 2009, according to a survey that indicates the country's economic trough may extend well into the third quarter.
The HSBC Flash Purchasing Managers Index, the earliest monthly indicator of China's industrial activity, fell to a seven-month low of 48.1 in June from a final reading of 48.4 in May.
It marked the eighth consecutive month that the HSBC PMI has been below 50, indicating contraction and matching a similar streak during the much deeper slowdown during the global financial crisis of 2008/2009.
Asian stocks fell and commodities slipped broadly.
After a sluggish economic performance in April and May, the HSBC figures suggest June fared little better, dashing hopes that activity would show signs of picking up in the second quarter.
Rather than a V-shaped recovery, China's economy may be facing more of a longer-term trough before it picks up, or a U-shaped recovery, analysts say.
"Economic activity going into June is still quite soft in general," said Kevin Lai, an analyst at Daiwa in Hong Kong.
Economic growth is widely expected to have slid for the sixth straight quarter in April through June, as the country feels the impact of the euro area debt crisis and as property controls weigh on domestic demand.
Connie Tse, an economist at Forecast Ltd in Singapore, said she sees an "increasing chance" that second-quarter annual growth will edge close to 7 percent, which would be the weakest pace of expansion since early 2009.
As recently as May, a Reuters poll had a median forecast of 7.9 percent for the second quarter.
The HSBC Flash PMI indicated pressure on both the domestic and externally oriented economy.
The new orders sub-index fell in June and the new export orders sub-index dropped even more sharply, to 45.9, its lowest level since March 2009 when China began to pull out of the doldrums of the global financial crisis.
Both input and output prices dropped to their lowest levels since the 2008/2009 crisis, while a sub-index measuring output hit a three-month low, according to the data compiled by Markit Economics Research.
Asian stocks slipped and commodities fell broadly. MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 1.4 percent, Brent crude slid to an 18-month low and the Australian dollar, sensitive to commodities demand, lost ground.
In China, the growth-sensitive energy sector fell. The yuan dropped the most from its daily trading marker set by the central bank since the currency's trading band was widened in April.
"With external headwinds remaining strong, exports are likely to decelerate in the coming months," HSBC economist Qu Hongbin said in a note accompanying the survey.
"The sharp fall of prices and moderation of new orders suggest weak domestic demand, posing destocking pressures for Chinese manufacturers."
The most striking element in Thursday's PMI report was the bearish outlook for exports in the orders index, which has twice this year darted over 50 to indicate expansion before subsequently retreating.
Shoots of optimism in April were drowned out by the European debt crisis, which is alarming policymakers globally. The euro area slump poses particular problems for China and other Asian countries used to relying on exports to fuel their economies.
Japan this week recorded its first monthly trade deficit with the European Union since at least 1979. On Wednesday, the Federal Reserve delivered another round of monetary stimulus, citing concern over the euro area.
An HSBC flash PMI on the EU due later on Thursday is expected to show the manufacturing sector contracting more deeply.
China's PMI survey will disappoint those who hoped that official efforts to support growth were gaining traction.
"The drop in the HSBC PMI goes against the grain of a lengthening list of other leading indicators, hinting that the economy is bottoming, including new loans, newly planned investment projects, real estate investment, exports, (and) car sales," Nomura economist Zhiwei Zhang wrote in a client note on Thursday.
In May, Beijing signalled its biggest push since joining the World Trade Organisation to boost private investment into areas previously reserved for the state sector, including rail, hospitals, power generation and energy transmission.
It has also fast-tracked some infrastructure projects and since November cut banks' required reserve (RRR) levels three times.
In its biggest move to bolster growth, China unexpectedly cut interest rates this month for the first time since the 2008/09 financial tsunami.
Analysts expect further measures from Beijing to prop up growth this year, especially as the euro area crisis appears to be deepening.
"I do not rule out another benchmark interest rate cut in Q3/Q4," Forecast's Tse said. "RRR cuts may occur more frequently."
The Reuters May poll forecast 2012 growth of 8.2 percent, the weakest pace since 1999, reflecting the sluggish global economy plus efforts by Beijing to reorientate the economy towards domestic consumption.
"We still expect full-year growth of 8.4 percent, which implies some cyclical recovery in the second half of the year," Daiwa's Lai said.
Both the HSBC-sponsored PMI and the Chinese government's official PMI have retreated after briefly pointing to an improved outlook in April. The HSBC final report for June and the government version are due to be published in the first few days of July.
The government survey includes more state-owned firms in its results, while the HSBC PMI captures more private firms, whose access to credit is more restricted. The two surveys also have different methodologies for seasonal adjustment.
The HSBC Manufacturing PMI index has not been consistently above 50 since June 2011, although it is far above readings of the low-40s reached during the depth of the global financial crisis.
(Additional reporting by Koh Gui Qing and Kevin Yao in BEIJING, Pete Sweeney in SHANGHAI, Manolo Serapio Jr and Clement Tan in SINGAPORE:; Editing by Neil Fullick)