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China HSBC final PMI at 50.4 in October

China's manufacturing activity picked up pace to a three-month high in October, a private survey confirmed on Monday, but a breakdown of the numbers showed growth rates in key areas continuing to slow.

The HSBC final purchasing managers' index (PMI) for October came in at 50.4, unchanged from the flash reading and following the 50.2 print in September.

Growth in new orders and new export orders - proxies for domestic and foreign demand, respectively - slowed to their lowest in four to five months, but remained above the 50-point level, which separates expansion from contraction. The level of output in factories fell to a five-month low of 50.7.

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This comes on the heels of China's official PMI for the same month released at the weekend, which fell to a five-month low of 50.8, from September's 51.1.

Chinese shares were modestly higher with the Shanghai Composite at a new 20-month high. The Australian dollar was little changed, down 1 percent against the U.S. dollar at a two-week low.

"Overall, [the data show China's economy] stabilizing at relatively slow rate of growth," said John Zhu, Greater China economist at HSBC. "It's still a situation where demand is still pretty subdued, both domestic and external. In our view, China is still running a gear or two below full speed."

Group of workers at a small parts manufacturing factory in China.
Mick Ryan | Getty Images
Group of workers at a small parts manufacturing factory in China.

China's economy has been hampered by unsteady exports, a downturn in its vast property space and cooling investment growth. While Beijing has spent much of the year delivering targeted easing to prop up+ the economy, it's refrained from more aggressive policy moves.

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The country's gross domestic product logged a 7.3 percent growth pace in the third quarter, the slowest rate since the global financial crisis. The government has a growth target of around 7.5 percent for the full year.

"I think if you look at big picture, the one trend that really struck us is the continued disinflation in China. The input and output prices in the PMI also confirm that. I think firms really don't feel confident enough in the demand outlook to raise prices so that has led to a squeeze in margins," said Zhu, who expects further support measures from the government.

According to Chi Lo, senior economist of Greater China at BNP Paribas Investment Partners, as long as the PMI readings stay above the 50-mark, policymakers can rest easy.

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"The way I see this slowdown is that it is government-engineered. They want it to slow. Beijing also has the ability to grow it if they want to but they don't want to because they want structural reforms to go forward," Chi said.

To be sure, not everyone is discounting drastic action.

"If we see more broad-based weakening in employment, that could be the one thing that will finally bring us over the threshold towards broad-based easing," said David Mann, regional head of research at Standard Chartered Bank.

"The challenge for authorities is that don't want to trigger another unsustainable credit boom but I think there could be a case in the fourth quarter for a deposit raise," he added.