China factory activity at 3-month high in October

'Reasonably cautious' on China: Morgan Stanley
'Reasonably cautious' on China: Morgan Stanley   

Chinese manufacturing activity picked up pace to a three-month high in October, a private survey showed on Thursday.

The closely-watched HSBC's China flash Purchasing Managers' Index (PMI) inched up to 50.4 from a final reading of 50.2 in September, beating the consensus forecast for 50.3 and staying above the 50 mark which separates expansion from contraction.

The Australian dollar was little changed against the greenback on the news, and both the Shanghai Composite and Hang Seng indices remained in the red.

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"The headline number has gone up, above consensus so we could probably be reasonably cautious about the economy and be okay with the idea that the economy is stabilizing," Jonathan Garner, emerging market equity strategist at Morgan Stanley told CNBC.

But a breakdown of the data showed output falling to a five-month low of 50.7, while new orders at home and abroad slowed.

The key employment component also shrank for a 11th consecutive month, stoking speculation of further stimulus from policymakers. Chinese authorities have repeatedly indicated their willingness to tolerate slowed economic growth as long as the job market remains stable.

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Morgan Stanley's Garner believes the case for further stimulus has strengthened in recent months, amid evidence of weakening inflationary pressure. China's annual consumer inflation slowed to 1.6 percent in September, a level not seen since January 2010, suggesting rising risks of deflation.

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"We think the inflation rate is running too low in China [so] we think they should be considering broader range of stimulus; so far it's been very micro-levels of stimulus," he said.

Beijing has unleashed a burst of targeted stimulus for several months now, to prop up an economy struggling with a slowdown, especially in the property sector.

Official data from the world's second-largest economy earlier this week showed growth in the third-quarter falling to 7.3 percent, the slowest pace since the first quarter of 2009, when China's growth rate slumped to 6.6 percent amid the depths of the global financial crisis.

The government has a 7.5 percent growth target for 2014.

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"Overall, although the improvement in the PMI is reassuring, the drivers of growth continue to come from the external sector; domestic activity remains soft," analysts at Barclays said in a note published after the data.

"Price pressures have been declining, consistent with falling commodity prices, and the inventory buildup seems to be increasing," they added.