Chinese Yuan
China's yuan. Reuters

China's manufacturing activity in September continued to remain in the phase of contraction, increasing the concerns over the slowdown in the economic growth of the world's second largest economy.

Data released by the China Federation of Logistics & Purchasing Monday showed that the Purchasing Managers' Index (PMI) rose to 49.8 in September, up from 49.2 in August. But the index remains in the area of contraction since the reading is below 50. The continuing shrinking of the manufacturing activity would increase fears of the likelihood of a sharp retardation in the economy.

The contraction of manufacturing activities in September is a reflection of the deteriorating export situation, which calls for more aggressive policy easing.

This news came after last month the preliminary HSBC Flash Purchasing Managers Index (PMI) showed that China's manufacturing activity stabilized in September compared to that in August. The preliminary reading of the PMI, a measure of the nationwide manufacturing activity, rose to 47.8 in September, compared to 47.6 in August.

There have been fears of a hard landing after data showed in July that China's economy slowed down to 7.6 percent in the second quarter, down from 8.1 percent in the first quarter. Beijing is targeting a growth rate of 7.5 percent this year. In 2011 and 2010, the economy grew 9.2 percent and 10.4 percent respectively.

Last month, China reported a trade surplus of $26.66 billion in August amid the slower-than-expected growth in exports and imports, raising the concern that the country wasn't doing enough to stimulate the economy and avert a slowdown. Exports advanced just 2.7 percent in August, compared to that in the same month last year, up from 1 percent in July. Imports dropped 2.6 percent in August compared to that in the same month last year, down from 4.7 percent rise in July.

The continuing debt crisis in Europe and the tentative U.S. recovery have hurt the demand for exports, the key driver of China's economy. The International Monetary Fund has warned that the escalation of the euro zone debt problems could slash China's 2012 GDP growth in half.

Beijing's goal this year will be to promote a steady and robust economic development, keep prices stable and guard against financial risks by keeping money and credit supplies at appropriate levels while being cautious and flexible. China's investment-driven economic model, though successful for decades, is no longer seen as sustainable with the consensus being that reforms will be needed to prevent a sudden downturn.