China’s vast manufacturing sector, the driving force behind the country’s celebrated economic growth story, 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 this year, arrived yesterday via the manufacturing purchasing managers’ index (PMI), a survey produced by CLSA, the Hong Kong brokerage.

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

Eric Fishwick, CLSA’s chief economist, who compiled the PMI report, said that China’s manufacturing activity was very weak last month. “Output contracted at a record pace, employment fell for the fifth month and work in hand declined.” he said. “With five back-to-back PMIs signalling contraction, the manufacturing sector, which accounts for 43 per cent of the Chinese economy, is close to technical recession.”

Although the main PMI index rose slightly in December from its record low in November, the reading of 41.2 means that the CLSA index remains far below the levels once considered normal. A reading 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 own PMI for December is due to be published tomorrow, and analysts believe that it is likely to show similar pessimism throughout the manufacturing sector.

The worsening meltdown spells yet more misery for Beijing as the Government battles to restore stable growth. Many believe that the Communist Party’s political legitimacy depends heavily on its ability to ride out the storm with the economy still behaving like a fast-growing emerging market. That may prove a tough act to pull off, Mr Fishwick said. Despite the size of the economy and the pace of its recent expansion, it remains fundamentally outward-looking and has been hit hard by the sharp drop-off in exports to both big consumers, such as the United States, and smaller Asian markets, which once provided steady demand.

In November, Beijing announced a gargantuan $586 billion (£404 billion) economic stimulus package involving huge public works spending. One commentator likened it to “trying to head off a speedboat with a supertanker”.

Particularly unsettling for Beijing, according to political and financial analysts, has been the greatly increased rate of job losses in the manufacturing heartlands. The Government’s efforts to craft a strong policy response to the crisis and cushion growth from the turmoil beyond its borders have been somewhat undermined by the images of hundreds of workers arriving at factory gates to find only a handwritten sign informing them that the plant has been closed.

Senior economists have reduced sharply their Chinese growth estimates as business conditions have turned brutal, although some say that they may be forced to make more downward revisions if January brings more sackings and factory closures and continuing decline in exports.

The new-year alarm bells come as even the most bullish observers now acknowledge another grim possibility — that growth in emerging markets around the world could turn out to 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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