HONG KONG - The HSBC Purchasing Managers' Index (PMI) dropped from 51 in October to a 32-month low of 47.7 in November, pointing to a sharp deterioration of business conditions, said the bank on Thursday.

The reading is the lowest level since March 2009 and the biggest monthly fall since August 2008.

The weakness was driven mainly by a sharp drop in both output and new orders, whose sub-components fell back into contraction territory, at 46.1 and 45 respectively, compared to 51.4 and 52.6 in October.

The new export orders sub-index stayed relatively stable however, improving marginally to at 52.1 from 52 in October, implying that November's weakness came more from the domestic front.` Inflation is easing at a much faster than expected rate, as is growth, said Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC.

China's CPI will likely to slow to around 4.5 percent year-on-year in November and around 4 percent in December, said Qu. He expected Industrial Production growth to slow to 11-12 percent year-on-year in the coming months, implying a below 8.5 percent GDP growth rate.

European sovereign debt crisis' weighing upon global exports growth and a correction overshoot in the property market will be two major downside risks to China's growth, he added.

Following The People's Bank of China's surprise reserve ratio cut last night, Qu expect another 150 basis points of reserve ratio cuts to come in the first half of 2012 and a 25bpt interest cut in the second half of 2012 when CPI slows to 3 percent.

This, plus tax cuts and fiscal spending should keep China's GDP above 8 percent growth next year, he said.