Led by a decline in confidence among manufacturing companies, China business sentiment fell to the lowest level in five months in September, having reached an eight month high in August.
The MNI China Business Indicator fell to 52.2 in September from a revised 57.3 in August, as the impact of stimulus measures waned and companies re-assessed the outlook for the future.
There was an even sharper decline in firms’ short-term outlook, with the Future Expectations Indicator falling to 53.4 in September from 61.8 in August.
The fall in overall sentiment was accompanied by declines in both production and new orders, while companies reported that credit conditions were the tightest since February.
Having risen to a three year high in August, Production fell back to the lowest level since April, although the trend and outlook remained reasonably firm.
Deflationary pressures returned to the fore in September with both price measures, Input Prices and Prices Received falling significantly.
The decline in the latter to the lowest since September 2012 is indicative of the overall weak demand backdrop faced by Chinese companies and continued spare capacity in certain sectors.
Credit conditions worsened in September, with the Availability of Credit indicator slipping back below the breakeven 50 level to the lowest since February.
The downturn follows a significant improvement in recent months and comes hot on the heels of the weaker lending data.
“This month, firms seemingly underwent a reality check with sentiment falling to the lowest since April,” said Philip Uglow, Chief Economist of MNI Indicators.
"The survey raises questions about whether the concerted effort to support the economy has sufficient momentum to keep growth in line with the government’s 2014 forecast of 7.5%."
The deflationary pressures evident in the survey give the central bank wiggle room should it decide to loosen monetary policy further.