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China's factory sector may contract in October

Tuesday, 22 Oct 2013 | 8:00 PM ET
Feng Li | Getty Images

China's manufacturing sector may have slipped into a contractionary phase in October following two months of expansion, according to Nomura.

The bank forecasts HSBC's flash Purchasing Managers' Index (PMI), which is due out on Thursday, slipped to 49.8 in October, below the key 50-mark which separates expansion from contraction. Last month, the final HSBC PMI reading came in at 50.2 – significantly below the flash estimate of 51.2.

"We think growth momentum has slowed in September as evidenced by the headline activity indicators such as exports and industrial production. The slowdown is due to weak demand and rising interest rates," Zhiwei Zhang, chief China economist at Nomura told CNBC, referring to the rise in three-year government bond yields, which have climbed to around 3.9 percent from 3 percent just four months ago.

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HSBC's flash PMI will be the first economic indicator for the fourth quarter, during which many economists expect growth momentum in the world's second largest will slow as the temporary boost from the government's stimulus measures unveiled in late-July peters out.

(Read more: China logs best growth so far this year in third quarter)

Nomura, for example, believes China's gross domestic product growth will slow to 7.5 percent on-year in the October to December period, from 7.8 percent in the previous three months.

However, not all economists are quite as pessimistic in their outlook for the country's manufacturing sector. While they did not have a precise forecast for the flash PMI, China economists at ANZ and RBS expect the index to remain above the 50 threshold in October.

(Read more: Is inflation a new risk for China's economy?)

"I think it will remain above 50 in the coming release given the growth momentum that we've seen in the third quarter," said Raymond Yeung, senior economist at ANZ.

Louis Kuijs, chief China economist at RBS said there could be an improvement in manufacturing activity in October following "a dip in the global trade cycle" in September as illustrated by weak export data from China, South Korea and Taiwan.

"We are witnessing a gradual improvement in demand from high income countries, this will help Asia's manufacturing sector," Kuijs said.

— CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H