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A key domestic manufacturing index dropped to a 32-month low in October, igniting market speculation that tight monetary policy may be eased.

The Purchasing Managers' Index (PMI) slipped to 50.4 last month from 51.2 in September, according to data released by the China Federation of Logistics and Purchasing on its website on Tuesday. The October figure was much lower than market expectations of 51.8. The index was 50.9 in August.

A figure above 50 indicates the manufacturing sector is expanding, while a figure below indicates a contraction.

The latest figure suggests that China's economic expansion could cool further in the fourth quarter, a statement from the CFLP said.

Most Chinese stocks fell on Tuesday amid market concern about an economic slowdown that may eat into corporate earnings despite speculation that the government could ease monetary policies to spur economic expansion.

The PMI is based on a survey of purchasing managers from 820 companies in 20 industries.Growth in the world's second-largest economy is likely to remain modest in the coming months but GDP for the entire year is predicted to increase by 9.2 percent, according to the CFLP.

China's economic growth rate was 9.4 percent in the first three quarters when measured against the previous year. In 2010, the year-on-year GDP increase was 10.4 percent, according to the National Bureau of Statistics.

Zhang Liqun, a senior researcher at the Development Research Center of the State Council,said that slower export growth and investment have dragged down economic expansion in the third quarter. The CFLP said that this is due to weaker external demand amid eurozone debt problems while tight monetary policies have led to cash-flow problems for many companies.

"Our leading index indicates that the European economy is set to continue slowing down andwill enter recession territory in the fourth quarter," said Joseph Dong, president and chief economist of Peking First Advisory.

If economic indicators continue to fall the government may ease current monetary policy and give more priority to maintaining economic growth.

Despite widespread concern about China's economic slowdown, Zhang Zhiwei, chief China economist at Nomura Securities, said that the low October PMI reading may be just seasonal and the economy still appears on track for a soft landing. The central bank, therefore, is unlikely to drastically change monetary policies in the last quarter of this year but it could take targeted measures to support sectors such as the construction of public housing and financing small-scale companies, he said.

（中國日報網英語點津 Helen 編輯）

About the broadcaster:

Emily Cheng is an editor at China Daily. She was born in Sydney, Australia and graduated from the University of Sydney with a degree in Media, English Literature and Politics. She has worked in the media industry since starting university and this is the third time she has settled abroad - she interned with a magazine in Hong Kong 2007 and studied at the University of Leeds in 2009.