We've just received another sign China's industrial sector is stabilising

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Activity levels for smaller Chinese manufacturing firms improved fractionally in September, according to the latest Caixin-Markit manufacturing purchasing managers’ index (PMI) report released on Friday.

The headline PMI came in at 50.1, a figure that was in line with expectations and a small improvement on August’s 50.0.

The PMI measures changes in activity levels in China’s manufacturing sector from one month to the next. A figure above 50 points to an improvement in activity levels while a sub-50 number indicates that they deteriorated.

Essentially, the higher the number, the better.

Although, at 50.1, it indicates that activity levels were largely unchanged from August, it was the third straight month that they either held steady or improved, something China’s not been seen since late 2014.

“Having stagnated in August, Chinese manufacturers signaled little-change to overall operating conditions during September,” said Markit.

“On a positive note, output and total new orders continued to expand, albeit marginally, while firms raised their purchasing activity for the third month in a row.”

Offsetting those improvements, the group noted that “cost-cutting initiatives contributed to a further marked reduction in employment” which, as a result “signalled a sustained squeeze on operating capacity as highlighted by a further increase in the amount of outstanding business”.

Fitting with recent producer price inflation data released by the government, Markit said that “inflationary pressures appeared to intensify during September, with both input costs and output charges rising at quicker rates than in August”.

It’s another sign that the bottom of the commodity price cycle was likely seen earlier this year, and an outcome that may have ramifications for both fiscal and monetary policy in China should the uplift in inflationary pressures persist.

The Caixin-Markit survey is focused on activity levels for small and medium-sized manufacturing firms, distinguishing it from the official manufacturing PMI report released by the Chinese government which monitors activity levels for all manufacturers, regardless of size.

Given the recent relationship between the two surveys, the small uptick in the Caixin-Markit survey bodes well for the official PMI report that will be released on Saturday.

In August it came in at 50.4, the highest level seen since October 2014. The strength in that survey was driven by improved activity levels among larger manufacturing firms.

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