Hong Kong manufacturing fell to a three-and-a-half-year low last month, as factories received fewer orders domestically and abroad.

An indicator of the sector, the purchasing manager index (PMI) tumbled to 49.4 in July, its first dip below 50 since December 2004, a survey released yesterday shows.

The decrease comes after a 0.6 percent drop, year-on-year, in the city's June exports, due to shrinking shipments to major markets.

Economic woes in the US - the biggest customer of Hong Kong manufacturers - have weakened demand for goods from Hong Kong and the rest of the world.

And both high inflation and rocketing oil prices have suppressed international shipments.

"Given the recent poor data of exports and retail sales, a fall in the July PMI to below 50 is hardly surprising," said Joe Lo, a senior economist at Citigroup. "The decline in new orders suggests that private-sector output will fall further in the coming months."

Sam Tseng, a treasurer at The Chartered Institute of Purchasing and Supply (CIPS), who was involved in the PMI survey, said the figure was mainly dragged by the decreasing number of orders from the US.

"Besides the weakened demand in the global market, the mainland is also generating fewer orders to Hong Kong companies," Tseng said by phone yesterday.

The Pearl River Delta (PRD) region , a major manufacturing base for Hong Kong exporters, will see a third of its factories relocate or close down in the next three years amid escalating costs, an austere environmental policy and energy shortages, said Tao Dong, a chief economist for non-Japan Asia at Credit Suisse.

Spencer Ma, a senior consultant at Stonehenge Consulting, said about 40,000 factories out of 70,000 in the Guangdong region are facing challenges brought on by economic regulations and a global slowdown.

Ma advises the factories on business development and consolidation.

A PMI of more than 50 represents an expansion in the manufacturing sector, compared with the previous month.

A reading of less than 50 represents a contraction, and a reading of 50 indicates no change.

Tseng at CIPS said Hong Kong's PMI struggled at the 50 level in the first six months of this year, but it dropped below 50 just once, in July.

"One month doesn't tell the whole story," Tseng said. "If it keeps falling for another two months, that would be very alarming."

The PMI is an indicator of the economic health of the manufacturing sector. It is based on five major factors: new orders, inventory levels, production, supplier deliveries and the employment environment.

Editor: Yan