HONG KONG (MarketWatch) — China’s factory activity is set to cool further in May, according to a preliminary PMI survey released Monday, as companies cut back orders amid tighter monetary policy and high commodity prices.

The news helped send markets across Asia sharply lower as investors scrambled to gauge the impact of weakening Chinese factory orders and what that could be signaling about the health of the global recovery.

An early reading of China’s manufacturing activity indicates that it slowed to a 10-month low in May, according to the results of the survey conducted by HSBC.

Monday’s “flash” release, compiled from a smaller base than the regular PMI, is designed to give a glimpse of what the broader survey will reveal next week. The preliminary survey showed that momentum slowed to 51.1 from the April reading of 51.8.

The result was below the long-term average of 52.3. Readings above 50 show an expansion in manufacturing activity, while those below indicate contraction.

“Policy measures put in place over the last six months are starting to have an impact,” said Royal Bank of Canada’s Hong Kong-based analysts in a note following the preliminary PMI release.

Still, Beijing will need to further tap the policy brakes to keep inflation curbed, even as the No. 2 global economy is on a downward trajectory, RBC said.

RBC forecasts that the People’s Bank of China will need to raise interest rates by an additional half a percentage point by the end of the third quarter. Gross domestic product is set for a more modest 9.5% expansion in 2011, after expanding at a 10.3% clip in 2010, RBC said.

However, HSBC cautioned against getting too pessimistic about the cooling economy.

So far, HSBC said, the PMI readings are consistent with annual industrial production growth of around 13%.

Companies running down inventories accounted for much of the deceleration in activity, HSBC said. It also cited external supply shocks as a contributing factor, as higher prices for industrial commodities dampened activity.

“There is no need to worry about a hard landing,” HSBC analysts said in a research note accompanying the preliminary PMI.

They added, however, that Beijing’s policy stance had clearly shifted from an earlier pro-growth bias.

“Price stability will continue to outweigh growth as Beijing’s top priority,” HSBC said.

Hong Kong and Chinese shares stayed on the defensive throughout the session, with China’s Shanghai Composite ending 2.9% lower and Hong Kong’s Hang Seng Index (HANGSENG) finishing down 2.1%. Read more on broad-based selloff in Asian stocks.