China faces risks of deflation, as manufacturers' selling prices fall for the 42nd consecutive month in August.

The Producer Price Index (PPI) shed 5.9% from a year earlier, much worse than market expectations of a 5.5% decline.

This was the sharpest drop in producers' prices since the global financial crisis in 2009.

Lower demand, as evidenced by weak Chinese exports, contributed to the decline. Analysts say another factor is the duplication of industries across China, resulting in chronic excess supply of export products.

The drop in producers' prices impacts Chinese firms that have to cope with heavier debt burden, as profits fall.

"The change in PPI is very worrying. It could affect corporate profitability, which in turn could affect consumption and the economy," economist Li Huiyong told Reuters.

Meanwhile, the Consumer Price Index (CPI), which represents prices of consumers goods, was up 2% in August from a year earlier. Much of it is attributed to rising food prices, not to better economic activity.

"The risk for China is still deflation, not inflation. PPI deflation will eventually filter down to affect CPI, and aggregate demand will continue to be weak," economist Kevin Lai told Reuters.

The latest figures come on the heels of a string of negative developments on the economic front, further fueling fears of a China-led global slowdown.

Earlier this week, China reported that its August imports fell 14.3% from a year earlier, worse than July's 8.6% decline. Exports retreated 6.1%, following an 8.9% drop in July. Both data point to weak demand at home and abroad.

Surveys have also showed manufacturers laid off workers at a faster rate last month.

This Sunday, fixed asset investment data is set to be released. Investors will be keeping a close eye on that as well as other data, including retail sales and industrial production, to see how the world's second biggest economy is faring.

China's central bank has already cut interest rates five times since November to boost economic activity, and with recent developments, more stimulus measures may be necessary.

The Finance Ministry has said it would strengthen fiscal policy to support the economy.

China's gross domestic product may drop below 7% this year, its weakest expansion in a quarter of a century.