Strong new orders lift China HSBC flash PMI to 7-month high in Oct


* China HSBC flash PMI rises to 50.9 (Sept 50.2)

* New orders at 7-month high, most sub-indexes up

* Policy tightening fears, weak exports cloud outlook

By Natalie Thomas

BEIJING, Oct 24 (Reuters) - Strong new orders drove thefastest expansion in China's manufacturing sector in sevenmonths in October, a preliminary survey showed on Thursday, moreevidence that the economy is stabilising although a strongrebound remains elusive.

The flash PMI figure, the earliest reading of China'smonthly economic performance, offers some positive news after disappointing export figures and September's manufacturing PMI,which had shown weak domestic demand.

The Markit/HSBC Purchasing Managers Index (PMI) stood at50.9 in October, above September's final reading of 50.2 andmarking a seven-month high. Ten of 11 sub-indices rose.

"China's growth recovery is becoming consolidated into thefourth quarter following the bottoming out in the third quarter"said Qu Hongbin an HSBC economist in a statement.

"This momentum is likely to continue in the coming months,creating favourable conditions for speeding up structuralreforms."

New orders rose to 51.6, the highest in seven months andwell above the 50 line separating expansion from contraction.

"From what we can see companies have drawn down inventoriesnow, so once you get a little bit of demand you get orderscoming in," said Stephen Green, an economist with StandardChartered bank.

The strong reading lifted Chinese stocks off two-week lows, although investors are jittery about possible policy tightening by the central bank to put a cap onrising inflation and housing prices. Those fears have seenshort-term money rates surge this week.


In the first nine months of the year, the $8.5 trillioneconomy grew 7.7 percent from a year earlier, putting it ontrack to achieve Beijing's 2013 target of 7.5 percent, whichwould be the weakest growth in 23 years.

Still, many economists see growth slowing ahead as globaldemand remains soft and as Beijing restructures the economytowards one driven more by consumer demand than investment andcredit.

"Despite the rise of this flash PMI reading, we believesequential GDP growth peaked in the third quarter at 2.2 percentand people should expect moderation to a more sustainable growthrate of 1.8-2.0 percent in the fourth quarter," said Ting Lu andeconomist with Bank of America-Merrill Lynch.

The government has repeatedly stated it will accept slowergrowth during the restructuring, but policymakers have alsoshown a willingness to step in to keep growth stable.

The flash PMI showed new export orders ticked up onlymarginally, suggesting a stabilisation in global demand but nosolid rebound.

Exports unexpectedly fell 0.3 percent in September, as fearsof a tapering in U.S. monetary stimulus weighed on demand fromSoutheast Asia. Exports were a drag on the economy in the firstthree quarters, subtracting 1.7 percentage points from growth

Policymakers stated they would support the trade sector ifit looked like missing an 8 percent growth target for this year.

Bank of America's Lu urged caution on attaching too muchsignificance to the flash PMI figures.

"We should keep in mind that the HSBC flash PMI is quitevolatile and the final reading could vary significantly from theflash," said Lu.

"The HSBC PMI has a quite small sample size with undisclosednumber of missing values."

Last month's final PMI figures delivered a shock to themarkets, coming in a full point below the flash reading forSeptember.

The flash PMI is based on 85-90 percent of total responsesfor each month.

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