Chinese workers go about their chores at a textile factory in Huaibei, east China's Anhui province on November 21, 2011.STR/AFP / Getty Images
China's massive manufacturing sector is slowing, raising fears of a hard landing for the Asian economic superpower that would deliver a devastating blow to a struggling global economy.
Confirming concerns that Europe's sovereign debt crisis is crimping demand for Chinese exports, a key measure of China's manufacturing activity has slipped to its lowest level since March, 2009.
The HSBC China Manufacturing Purchasing Managers' Index fell to a reading of 48 in November, down from 51 in October. A reading below 50 indicates contraction.
"The drop suggests that the economy has taken a turn for the worse after a few months in which conditions seemed stable," Mark Williams and Qinwei Wang of London's Capital Economics said in a report.
The health of China's manufacturing- and investment-driven economy, the world's second-largest, is acutely important. Strong growth in China has been a prime driver of a recovery from the global financial crisis. China enjoyed GDP growth of more than 10 per cent in 2010 and the World Bank is forecasting 9.1-per-cent growth this year.
China's policy makers, who have been preoccupied with containing persistently high inflation and raised borrowing rates and bank reserve requirements, are now expected to shift toward monetary easing in light of the slowdown.
The Chinese economy has flown into "a stormy zone," said Na Liu, the founder of CNC Asset Management Ltd. and an adviser on Chinese issues to Scotia Capital.
Last week, home sales in the top 10 cities in China fell 38 per cent compared to the same period last year, and average home prices in China's 70 largest cities ticked lower for the first time this year. A weakening property market would diminish investment activity and demand for raw materials.
Equity markets in China remain weak despite signs of a looming shift in monetary policy. Chinese steel production has fallen to its lowest level in a year, tempering investor enthusiasm for commodities including coking coal and iron ore.
Mr. Liu believes the Chinese economy will eventually fly out of the stormy zone and achieve a soft landing. However, "the bumpy ride will likely continue in the near term, particularly during the winter months, as winter is always the low season for Chinese manufacturing and construction activity," he warned in a note to clients.
"The seasonal weakness might be enhanced by the uncertain process of a housing market correction, which is likely to last for at least a few months."
China is not the only major economy in the Asia-Pacific region enduring a manufacturing slow down. In recent weeks, purchasing manager surveys in Taiwan, India and Australia have all recorded a drop in factory output, raising concerns for Canada's resource-driven economy.
Australia's central bank lowered lending rates this month to counter the slowdown. Mr. Liu does not expect China's policy makers to shift to outright monetary easing until mid-January, or right before the major holiday period of the annual Spring Festival.
Declining factory orders have intensified labour unrest in some manufacturing regions, according to China Labour Bulletin, an advocacy group that monitors labour disputes. It said more than 7,000 workers at a Taiwanese-owned shoe factory in Dongguan, in China's Guangdong province, took to the streets and clashed with police last week to protest layoffs, wage cuts and a shift in some production to lower-cost regions in China and other Asian countries.