New orders have dropped sharply and prices have plunged to the point where deflation may become the Chinese leadership's next battle, the results of the latest Xinhua Finance/MNI China Business Sentiment Survey indicate.

The headline overall sentiment index hit its third successive record low at 35.20, down from 39.87 in November, and that gloom was reflected in other key indicators such as new orders and production.

But the most alarming signal in the latest monthly survey was seen in the indexes for prices. The index for input prices, which was in the 80s as recently as August as the government fought inflation on a number of fronts, hit an all-time low of 26.36, a record low for the third straight month. The index was at 31.89 last month.

The index for prices received rose slightly but remained near the record low set last month. The index was 36.82 in December, up from 35.56 last month.

Perhaps even more worrying for the prospects of Chinese macroeconomic and monetary policy is that companies appear to expect prices to continue falling.