China’s vast manufacturing sector, the driving force behind the country’s celebrated economic growth, is on the brink of technical recession as order books run dry and once-humming factories fall silent.

The bleak snapshot of business conditions, which may herald yet more shrinkage in China’s growth prospects for next year, arrived today via the Manufacturing Purchasing Managers’ Index (PMI), a survey produced by CLSA, the Hong Kong brokerage.

Widely scrutinised by markets, the monthly report is viewed by investors as among the most useful leading indicators for the Chinese economy. Over the past 12 weeks it has painted far more rapidly worsening picture than anyone predicted and now highlights China’s unexpectedly high vulnerability to the global financial crisis.

“Chinese manufacturing activity was very weak in December. Output contracted at a record pace, employment fell for the fifth month and work in hand declined,” said Eric Fishwick, CLSA’s chief economist and compiler of the PMI report,

"With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession.”

Although the main PMI index rose fractionally in December from its all-time low in November, the reading of 41.2 means the index remains well below the levels once considered normal. A reading of below 50 means conditions are worsening: the accompanying manufacturing output index plunged to 38.6, marking the sharpest drop since the survey began.

The Chinese Government’s PMI for December is scheduled to be published on Sunday and to show a similar degree of pessimism throughout the manufacturing sector.

The worsening meltdown spells more misery for Beijing as the Government battles to restore stable growth and one of its chief sources of legitimacy. In November, Beijing announced a $586 billion (£406 billion) economic stimulus package involving huge public works expenditure in a strategy that one commentator said was like “trying to head off a speedboat with a supertanker.”

Economists slashed their Chinese growth estimates as business conditions turned brutal, though some say they may be forced to make new downward revisions if January brings even more sackings, factory closures and decline in exports.

The alarm bells come as even the most bullish observers now acknowledge another grim possibility: that growth in emerging markets could be one of 2009’s bigger casualties. Private sector analysts are forecasting economic contraction for at least half a dozen Asian countries this year.

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