Last month HSBC reported, based on the most recent China Purchasing Managers’ Index (PMI), that the Chinese manufacturing sector continued to expand in September.

Although the overall PMI declined slightly, from 55.1 to 55.0 in the month, the PMI was well above the critical 50 level that indicates an expanding manufacturing sector. According to the research firm Markit, which compiles the index, the PMI has been above 50 for six consecutive months.

In September, production in China slowed slightly from 58.4 to 57.6, although the sustained expansion of manufacturing activity since March led firms to add jobs in September, causing the employment index of the China PMI to increase at its fastest pace in more than two years.

Despite this sustained expansion in manufacturing activity, the Baltic Dry Index – a measure of the shipping costs of commodities used by China’s manufacturers such as iron ore and coal – has essentially moved sideways since mid-August.

Following a period of inventory restocking, it appears manufacturers in China are putting off adding to their stocks pending the annual renegotiation of iron ore prices with producers such as Rio Tinto Group and BHP Billiton Ltd.

Looking forward, the fact that the China PMI employment index exhibited a healthy increase in September suggests that domestic demand in China will continue to expand through the remainder of 2009 and into 2010.

According to Purchasing.com, however, the combination of increased vessel capacity and a moderation in Chinese imports of iron ore and coal will probably cause the Baltic Dry Index to exhibit only moderate growth through to 2010.

This pattern of growth will be consistent with a sustained, measured expansion in China as well as in North America.