HSBC says manufacturing contracted in Sept

China's manufacturing activity contracted for an 11th straight month in September, banking giant HSBC said on Thursday, as factories struggled with weak demand and hard-to-sell inventories.

The preliminary reading of the purchasing mangers' index released by the British bank hit 47.8 this month, a mild improvement from a final reading of 47.6 in August, HSBC said in a statement.

But the latest reading marked nearly a year of continuous contraction since November, underscoring broader economic weakness and shrinking demand in key overseas markets.

The index is closely watched as it gauges nationwide manufacturing activity, a key sector of the world's second-largest economy. A PMI reading above 50 indicates expansion, while anything below 50 points to contraction.

China's official PMI figure for August released earlier this month hit a nine-month low of 49.2.

Chinese shares sank to their lowest in two weeks on Thursday, after data showed the rate of the slowdown in the country's manufacturing activity was stabilizing, lowering hopes for any imminent policy easing.

The benchmark Shanghai Composite Index on the Shanghai Stock Exchange closed at 2,024.84 points on Thursday, down 42.99 points, or 2.08 percent, from the previous close.

Qu Hongbin, HSBC's Hong Kong-based chief economist for China, said the lackluster manufacturing activity in September was due to "weak new business flows and a longer than expected destocking process".

But he said effects of the loosening measures that authorities have taken in response to slowing economic growth should start to kick in during the next quarter.

"The recent easing measures should be working to lead to a modest improvement from the fourth quarter onwards," he said in the statement.

HSBC said final PMI figures for the month will be released on Sept 29.

The authorities this year have tried to boost the economy with interest rate cuts and by lowering the amount of cash that banks must keep on hand in a bid to spur the kind of lending that could stimulate stronger growth.

China's economic growth slowed to 7.6 percent in the three months through June, the sixth straight quarter of weakening expansion and the worst result since the height of the global financial crisis.

Weak economic data in the current third quarter have raised fears China's growth may have slowed for a seventh straight quarter when gross domestic product figures are released next month.

Problems in the broader global economy, including Europe's prolonged debt crisis and a sluggish recovery in the United States - both major trading partners of China - have been a drag on growth.

Analysts at consultancy Capital Economics expect China's third-quarter growth to further slow to 7.1 percent due to uncertainties in the country's property sector and the ailing global economy.

"Overall, there is not enough in the latest data to be confident the economy has turned the corner, though momentum does at least appear stable," they said in a report on Wednesday, referring to previously released government figures.

Yao Wei, an economist at Societe Generale in Hong Kong, said a "temporary recovery" in China's economy could be expected in the fourth quarter as funds for infrastructure projects announced in past months are gradually invested.

However, uncertainties remain after policymakers have been cautious in imposing aggressive stimulus steps on concerns over banking risks after new loans doubled over the past three years.

"It is very hard and slow for China's manufacturing sector to recover without sweeping stimulus measures", she said.

Premier Wen Jiabao said this month that China is still likely to achieve its annual economic growth target of 7.5 percent. Even so, that would mark a significant slowdown from 9.3 percent growth in 2011 and 10.4 percent in 2010.

The Ministry of Commerce said on Wednesday that China faced "enormous difficulties" in meeting its target to maintain 10 percent growth in trade this year, citing weak overseas demand as the world economy remains under pressure.

China Daily-AFP