The country's manufacturing index has fallen to 46.4 from 48.8 in May, its third-lowest reading since being created in April 2011, HSBC said in a report it issued July 1.
The purchasing managers index (PMI), which measures the health of the manufacturing sector, went down due to a sharp decline in output and new orders in June, causing many companies to cut jobs and purchases.
"The domestic market was the principal source of demand weakness in June, as the level of new export business fell only slightly.
"With inflows of new work from both domestic and foreign sources deteriorating, manufacturing production was also substantially reduced."
The sharp reduction in inflows of new business had also led to a build-up of stocks of finished products in June as inventories rose at the fastest pace in a year.
This replenishment of stocks could also reduce the need to raise production in coming months.
Manufacturers argued that successful negotiations with vendors for faster payment would make delivery times shorter up to a point.
Price pressures continued to ease during the latest survey month.
Though average input costs had risen throughout the year-to-date, the latest rate of inflation was only marginal and the least marked during the current sequence of increases.
Manufacturers had cut their average selling prices in an effort to stimulate sales.
The PMI has remained at a sub-50 level signalling contraction for two successive months.
Commenting on the survey, Trinh Nguyen, Asia Economist at HSBC said: "The sharp downturn of manufacturing activity suggests that domestic weakness continues to weigh on overall business activity.
"Sales are sluggish despite [discounts] due to low appetite for consumption.
"Coupled with this, external conditions have weakened, with lower demand from China and South Korea.
"With June headline inflation accelerating, the central bank will adopt a wait-and-see mode for now."
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