China's official manufacturing PMI came in at 51.2 for September, up from 50.9 in August. This is broadly in line with the consensus expectations. However, historically the September PMI levels were higher than the August readings by an average of 2.3ppts. After stripping out this seasonal effect, we believe the underlying trend for manufacturing activities is in fact deteriorating. HSBC's PMI (at 49.9), with does a better job on seasonal adjustment, reported no change in September from August. We believe that the headwinds against the manufacturing sector will include weakening export orders, the likely resumption of an inventory destocking process, slowing demand for properties, and tight credit conditions. If Europe enters a mild recession in Q4, which is becoming increasingly likely, China's manufacturing PMI will likely fall slightly below 50 towards the end of this year.

As part of the official PMI report, the raw material inventory index edged up to 49.9 in September from 48.8 in August, while the input price index fell a bit further to 56.6 from 57.2. These trends, together with the likely further decline in global demand for commodities, increase the risk of another round of inventory destocking in China.

Of the five sectors that posted the strongest new orders index (near or above 60), four of them – tobacco, pharmaceutical, auto, and food – represent mainly consumer demand. To the contrary, the investment driven sectors – such as raw materials and energies, and export-driven sectors – such as textiles and apparels, are facing weaker demand. Some of the worst readings for the new orders index are: oil (42.7), nonmetal mining products (43.1), ferrous metal smelting (47.8), and textile (48.1).

• [Editor:editor]