The latest official PMI figures show that the mainland's economic growth remains on track but the export sector is facing rising downside risks.

The manufacturing PMI released by the National Bureau of Statistics (NBS) on Thursday posted a small, seasonal rebound in August to 50.9, against a market consensus of 51, from 50.7 in July.

The details of the report show falling export orders, weak new orders and still-elevated input costs, which suggests increasing difficulties facing manufacturers, in addition to tight credit availability.

Barclays' baseline scenario does not call for a near-term reversal of tightening measures, as the government did in 2010. Therefore, I expect continued moderation in industrial activity in the coming months and see external weakness and uncertainties, as opposed to slowing domestic demand, posing a bigger downside risk to growth.

It is worth noting that the headline NBS PMI rose 0.4 percent month-on-month, compared with 1.0 percent in August 2010, suggesting weaker growth momentum in the third quarter of 2011 than that of last year. Recall that policy, both monetary in terms of credit tightening and fiscal in terms of approval of new projects/investment, started to ease around mid-July in 2010. This year, policy tightening has stayed relatively firm into September.

Overall, I believe GDP growth is still on track to slow to around 9 percent this year from 10.3 percent in last year. The year-on-year GDP growth is expected to fall to close to 9 percent in the third quarter and to below 9 percent in the fourth quarter, versus 9.5 percent in the second and 9.7 percent in the first quarter.

On the policy outlook, my view remains that monetary policy will be flexible in response to the changing situation, and external developments will be key in watching for hints of policy direction in the coming months.

Premier Wen Jiabao said on Wednesday that "stabilizing prices remains the government's top priority - the direction of economic policy cannot change". This suggests the government remains focused on controlling inflation, despite the deteriorating global outlook.

I continue to see no loosening of monetary policy in the near term, but I believe the tightening cycle is close to an end, with at most one more interest rate hike (it is unlikely to be delivered given rising external risks) and "targeted easing" - ie, measures to support vulnerable sectors of the economy, such as SME financing - is probably under way.

In the details, the new export orders index slipped below 50, falling to 48.3 from 50.4, in contrast to the historical pattern, which suggests weakening external demand that will feed through activities more visibly going forward. The PMI new orders index stayed at 51.1 as was the case for July, also weaker than historical performance. The import index rose to 49.7 from 49.1 in July, but still below the 50 threshold, pointing to moderate domestic demand. The raw materials inventory index rose to 48.8 from 47.6 in July, and the finished goods inventory declined to 48.9 from 49.2.

The input costs sub-index points to still elevated pipeline inflation pressure, which supports my view that even though CPI inflation likely peaked in July (I forecast August CPI inflation will ease to about 6.2 percent from 6.5 percent in July), inflation will only decrease gradually. The NBS PMI input costs index rose to 57.2 from 56.3 in July after declining for five consecutive months since March.

As for the other two leading indicators, the HSBC PMI rose to 49.9 from 49.3 in July, at the expansion/contraction threshold of 50, while the MNI business sentiment survey dropped to 55.4 from 57.2 in July.

The author is vice-president and China economist at Barclays Capital Asia. The opinions expressed here are entirely her own.

(HK Edition 09/02/2011 page2)