Event

The official manufacturing purchasing managers' index (PMI) held steady at 51.1 in September, unchanged from August, according to a bulletin posted by the China Federation of Logistics and Purchasing (CFLP) on October 1st. A reading above 50 denotes an expansion in manufacturing activity.

Analysis

The PMI pointed to a surprising level of resilience in the economy, given the headwinds coming from the sagging property sector. The stability of the PMI stood in contrast to the most recent economic data, which showed that growth in industrial production and fixed-asset investment both slumped in August. It may be that the weakness in the August figures overstated the sluggishness of the economy. A separate manufacturing PMI published on September 30th by HSBC/Markit registered 50.2, also showing no change from August.

Although the PMI readings were better-than-anticipated, the sedate pace of expansion highlighted still-weak momentum behind economic growth. The new orders sub-index of the official PMI, which reflects domestic and international demand, stood at 52.2 in September, down by 0.3 percentage points from the previous month. Given that the export orders sub-index rose by 0.2 percentage points in September, to 50.2, this suggested that most of the drag came from the domestic economy. The government will also view with concern signs that manufacturers are continuing to shed workers. The sub-index for employment in the CFLP survey stood firmly in contractionary territory, at 48.2 in September, unchanged from a month earlier.

The slowdown has become prolonged and severe enough to warrant fresh policy fine-tuning.Following a liquidity injection into the banking system earlier in the month, the People's Bank of China (the central bank) eased mortgage restrictions on September 30th, allowing purchasers of second homes to qualify for discounted downpayments and interest rates that were previously only available to first-time buyers. Although the change was one of the more significant stimulus measures taken so far in 2014, it was also one of the more conservative options available to economic planners. As long as the labour market remains stable, they are likely to continue to prefer modest measures over dramatic policy loosening.

Impact on the forecast

We plan to revise downwards our real-GDP growth estimate in 2014, to 7.3% from 7.5% previously. The latest PMI does not change our view.