China's factory sector contracted for a third consecutive month in September as flagging overseas demand put the brakes on new orders, HSBC's China Flash PMI showed on Thursday.
The continued deceleration in the vast manufacturing sector pointed to a slowdown in the world's second-largest economy, but analysts see little near-term risks of a hard landing due to resilient domestic demand.
The flash Purchasing Managers' Index (PMI), designed to preview China's factory output before official data is released, dipped to 49.4 in September from August's final reading of 49.9 and hovered below the 50-point mark for the third straight month.
China's August exports pulled back from a record high and imports jumped, indicating the economy is feeling the pinch from weaker global growth while domestic demand remains resilient.
Analysts generally expect export growth to slow further in the coming months as indicated by weaker new orders.
Both new orders and new export orders sub-indices fell further below the 50-point mark in September, reflecting declining global demand as consumers fret over the possibility of another U.S. recession and a spiraling eurozone debt crisis.
Other sub-indices that missed the 50-point mark include those for output, stocks of purchases and employment.
"Fears of a hard landing are unwarranted. External demand weakened a little but official trade data still show solid export growth," said Qu Hongbin, China economist at HSBC.
"Resilient domestic demand is sufficient to support around 8.5-9 percent growth in the coming quarters," he said.
Indeed, HSBC believes a PMI reading of as low as 48 in China still points to annual industrial output growth of 12-13 percent and 9 percent expansion in gross domestic product, even if it indicates a contraction in factory activity on the month.
China's industry sector, which includes manufacturing and resource exploration, accounts for about 40 percent of the country's gross domestic product.
After economic growth of 10.4 percent for all of 2010, the rate of expansion of China's economy eased to 9.5 percent in the second quarter.
Factory price pressures, on the other hand, picked up in September, indicating Chinese policymakers still have a tough challenge bringing inflation under control.
The input price sub-index rose to 58.8 in September — the highest in four months.
Annual consumer inflation eased to 6.2 percent in August from a three-year high, while economic activity slowed, underlining expectations that the central bank may hold off on further policy tightening.
Inflation is widely expected to cool gradually towards the end of 2011 as economic growth slows, but it will almost certainly overshoot the full-year official target of 4 percent.
Still, the central bank is far from easing policy. Premier Wen Jiabao and other leaders have repeatedly stressed that wrestling inflation remains the top policy priority.
The People's Bank of China has raised interest rates five times and lifted banks' reserve requirement ratios (RRR) nine times since October.
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