“The sharper contraction of new export orders and the lingering pressures on job markets mean that Beijing should step up easing to support growth and employment,” Qu Hongbin, chief China economist for survey sponsor HSBC, said in a statement.

Two cuts to interest rates, the easing of bank reserve requirements that freed about 1.2 trillion yuan (or US$190 billion) for lending and the approval of infrastructure projects worth more than US$150 billion have so far failed to arrest the decline in China’s overall economic growth.

“Fiscal measures should play a more important role in the coming months,” Qu said.

Analysts expect this year to be China’s weakest full year of growth since 1999 at just 7.7 per cent, according a Reuters poll which forecasts annual growth of 7.4 per cent in Q3, down from Q2’s 7.6 per cent.

The slide in the PMI’s export orders sub-index to a three-and-a-half-year low of 44.9 is a crucial gauge for the accuracy of that call.

Exports generated 31 per cent of gross domestic product last year, according to World Bank data, and support an estimated 200 million jobs - around a quarter of the country’s workforce.

Export growth this year is averaging around 7.8 per cent versus last year. August’s growth slumped to 2.7 per cent compared with a year ago and the Commerce Ministry sees a risk that things get worse in the months ahead - jeopardising the official 10 per cent target for expanding trade this year.

An adviser to China’s central bank conceded on Thursday that Beijing policymakers had underestimated the severity of this year’s global economic slowdown and said that further cuts to interest rates or reserve requirements would hinge on any new deterioration in the external environment.

China’s exports have been hit hard by the festering sovereign debt crisis in the European Union, where a slide back towards recession has sapped demand in the single biggest foreign market for Chinese factory goods.

Analysts say the destocking it has triggered has dragged down industrial production growth and will ultimately show up when Q3 economic data is published in mid-October.

“We expect the data to show that demand remained weak, destocking continued and the recovery has yet to happen,” said Tao Wang, China economist at UBS in Hong Kong.

“We forecast that industrial production growth slowed to about 8.6 per cent year-on-year in September, while Q3 GDP growth slowed to 7.3 per cent year-on-year,” she wrote in a client note.

Tao believes the deterioration is so entrenched that GDP growth will slow to an annual rate of 7.0 per cent in Q4 before rebounding through the course of next year.

The consensus view is that Q3 is the nadir of this cycle and the HSBC PMI offers some sign that this may be the case, despite the index having consistently pointed to a more bearish economic backdrop this year than China’s official PMI.

The official PMI is set to be released by the National Bureau of Statistics (NBS) on Oct. 1 and analysts polled by Reuters expect it to have rebounded to 49.8 from August’s 49.2.

A difference in samples and survey methodology largely explain the discrepancy. The NBS captures data from China’s biggest firms - the dominant state-owned enterprises - while Markit, the UK-based data provider that compiles the survey sponsored by HSBC, tracks mainly smaller private sector firms.

Markit said its survey detected some signs of stabilisation in manufacturing activity in September as the rate of deterioration in the sector eased.

Backlogs of work remained steady for 77 per cent of respondents, while only 13 per cent reported a decrease.

And it said the rate of job cuts reported was relatively modest, with nearly 85 per cent of survey respondents indicating no change in employment levels on the previous month.

Unemployment is a vital indicator for China’s ruling Communist Party, which is acutely sensitive to anything that could trigger discontent in the run-up to its party congress - expected later this autumn - when a new generation of leaders will be named ahead of a once-a-decade handover of power.

The loss of millions of Chinese factory jobs in a matter of months in late 2008 as world trade ground to a halt during the depths of the global financial crisis triggered a massive 4 trillion yuan stimulus package from Beijing.

The lack of job cuts so far and persistent signs of tightness in the labour market are cited by analysts as one reason for the government’s reluctance to open the stimulus taps this time around, along with attendant inflationary and speculative risks that it could unleash.

Credit ratings agency Fitch said on Friday it had downgraded its this year growth forecast for China to 7.8 per cent, from 8 per cent previously, on a combination of slowing exports and efforts to squeeze speculative risks from the economy.

But it said it did not expect Beijing to deploy any more than marginal monetary and fiscal tools to boost growth, unless there was a sudden deterioration in the labour market.

“The resilience of the labour market seen in current data suggests growth of 7.5-8.0 per cent may be in line with the economy’s potential rate,” Fitch said.