Chinese factory activity contracted last month for the first time in nearly a year when the Caixin PMI dipped below 50, the threshold for growth. And now, early indicators for the month of June – including one satellite-based measure - suggest that there’s more pain ahead for the manufacturing sector in the world’s second-largest economy.

A reading published by San Francisco-based SpaceKnow Inc. which uses commercial satellite imagery to monitor activity across thousands of industrial sites signaled deterioration in the country’s manufacturing sector for the first time since August. The gauge, known as the China Satellite Manufacturing Index, fell to 49.6, below the 50 break-even level. The index incorporates satellite data from thousands of industrial sites across China.

Satellite imagery has often proved eerily prescient in the recent past: In the US, satellite data analyzing activity in retailers' parking lots pointed to significant activity weakness at core US retail locations, even as sentiment indicators were suggesting an uptick in sales following the election.

Meanwhile, small- and medium-sized enterprises showed the lowest level of confidence in 16 months, and conditions in the steel business remained lackluster, according to Bloomberg.

Some other indicators have been slightly more sanguine: sales-manager sentiment stayed positive, and outlook of financial experts recovered.

Still, data suggest that output in China’s economy slowed during the second quarter after a strong start to the year, with investment slowing, some credit becoming tighter and signs that curbs on the country’s property market are starting to have an impact.

Should growth continue to slow, China’s leaders would find themselves in an awkward position, with the country’s twice-a-decade leadership transition expected to occur this fall when the 19th Party Congress convenes to appoint its new senior leadership. It’s widely believed that China’s President Xi Jinping will begin serving his second five-year term.

Another gauge, Standard Chartered Plc’s Small and Medium Enterprise Confidence Index slumped to a 16-month low at 54.7 – a sign that smaller companies are finding it harder to obtain credit as regulators move to damp financial risks. A sub-gauge of lending fell below 50, signaling deterioration, for the first time on record.

These data show that Chinese banks are growing reluctant to lend to small Chinese companies, preferring larger, more established peers, this leaves those companies in line to feel the brunt of the People’s Bank of China’s monetary tightening, as the central bank tries to ease the market off of its dependence on repeated liquidity injections.

“Although the central bank will likely provide sufficient liquidity to avoid a liquidity crunch, banks may still prefer lending to bigger rather than smaller companies amid tighter liquidity conditions,” according to Standard Chartered's Kelvin Lau and Hunter Chan.

That could be the spark that ignites China’s “Minsky moment” - the financial cataclysm that Kyle Bass and other perma-china-bears have been waiting for when China’s overleveraged market crumbles to dust – might finally be in the offing. Indeed, though China's markets have been relatively calm recently, the PBOC's attempts to tighten liquidity have sparked some instability in recent months. Back in March, the central bank had to engage in mini bailouts when a jump in interbank rates caused some small regional lenders to default on their interbank loans after money market rates shot higher. Meanwhile, China's weakening credit impulse should give any China bulls pause.

In one ominous sign, Hong Kong microcap stocks crashed overnight after a rumor that local exchanges might force all “zombie companies “ to delist triggered a wave of margin calls. The selloff triggered worries about stability in the country’s equity market, which has seen a series of spectacular crashes in individual names this year, despite the broader Hang Seng benchmark’s strong performance.

Compounding worries for investors is a report published by Caixin a few weeks ago saying that two dozen Chinese companies asked their employees to buy their stock, promising to cover their losses – a transparent attempt at pumping up the price to fend off collateral calls on stock-backed loans.

What's more, in a fantastic expose from earlier this month, Reuters reported on how Chinese firms' "rehypothecating" collateral between two and three borrowers, suggesting that billions, or maybe even trillions, of dollars' worth of loans are based on so-called ghost collateral, leaving them effectively unsecured.

Meanwhile, the S&P Global Platts China Steel Sentiment Index remained at a lackluster level -- 38.12 out of 100 points. The gauge is based on a survey of about 75 to 90 China-based market participants including traders and steel mills.

"Market participants do not expect any great improvement over the coming month," Paul Bartholomew, a senior managing editor at S&P Global Platts in Melbourne, wrote in a release. "Confidence in the export market has evaporated after two stronger months, as overseas customers are wary about buying when the price direction is so unclear.”

In addition to the ominous economic indicators, political tensions are worsening, too. Two weeks after Trump's ominous China “tried and failed” to contain North Korea tweet, the leaders of the two global powers appear to be getting closer to the default relationship that many expected after the election – that is to say, a hostile one. The Trump report follows last night's news that the United States plans to place China on its global list of worst offenders in human trafficking and forced labor, a step that according to Reuters could aggravate tensions with Beijing.