China's October factory activity may show mild growth amid weak demand

BEIJING (Reuters) - Activity in China's manufacturing sector may have shown mild expansion in October, a Reuters poll showed, adding to evidence of more stability even as weak demand continues to hamper some factories.

The official manufacturing Purchasing Managers' Index (PMI) is expected to hold at 50.4 in October, unchanged for the third month, according to the median forecast of 26 analysts polled by Reuters.

That would only be marginally above the neutral 50.0 mark separating expansion in activity from contraction on a monthly basis, pointing to persistently sluggish demand that has raised doubts about whether the improved momentum can be sustained.

Profits growth in China's industrial firms in September slowed sharply from a month ago as some key manufacturing sectors stumbled on weak activity and rising debt, official data showed on Thursday.

Demand remained weak both at home and aboard, and delayed payments put a strain on firms' cash flow, according to an official from the National Bureau of Statistics (NBS).

Profit gains may be due largely to rebounding prices for commodities such as coal and steel, as China looks set to meet its capacity cut goals ahead of time, which reinforced the view that growth momentum could be wearing off as the effects fade.

"The improvement is mainly seen in prices, not in volume. So that could mean the demand is still at weak levels," said Wang Jianhui, general manager of the research department at Capital Securities.

Factory activity in China has been hovering around the no-change mark this year before it unexpectedly expanded in August, buoyed by a government infrastructure building spree and a housing boom.

Recent data has pointed to signs of stabilisation, with annual economic growth of 6.7 percent in the third quarter matching the previous quarter, as increased government spending and a property boom offset stubbornly weak exports.

But economists cited numerous risks ahead, as a booming property market might be tappering off and private investment has only picked up slightly after hitting record lows.

While property investment has quickened in recent months, as real estate developers ride on strong sales to finish construction project, China's heightened attempts to cool prices in more than 20 overheated cities is adding to fears that a housing boom may be peaking, threatening one of the economy's main growth drivers this year.

Private investment has dropped to record lows and grew only 2.5 percent in the first nine months of the year. A member of China's central bank monetary committee attributed a slowing economy and industrial overcapacity to fewer investment opportunities.

Signs of stability in the world's second-largest economy support the growing consensus that China's central bank will hold off on further monetary easing such as interest rate cuts through at least the end of the year.

But monetary policy is seen to stay on the loose side as the government looks to stimulate the economy. Chinese banks extended 1.22 trillion yuan (148.72 billion pounds) in new loans in September, well above expectations and capping a record nine-month lending spree despite growing concerns about the risks from the country's ballooning debt.

The official manufacturing PMI data will be released on Nov. 1, along with the official non-manufacturing PMI.

Services continued to expand robustly in September. Beijing has been counting on a strong services sector to pick up the slack as it tries to shift the economy away from a dependence on heavy industry and manufacturing exports.

The Markit/Caixin PMI, a private gauge of manufacturing activity which focuses more on small- and mid-sized firms, is also due on Nov. 1. Analysts expect it to rise slightly to 50.2, compared with the previous month's reading of 50.1.

(Reporting by Yawen Chen and Kevin Yao; Editing by Jacqueline Wong)