Published: Monday, 2 Nov 2009 | 2:46 AM ET

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China's manufacturing sector expanded at the fastest pace in 18 months in October as demand from both overseas and at home grew quickly, an industry survey showed on Monday, pointing to sustained strength for the sector.

Eugene Hoshiko / AP A worker welds the interior of a car at the Geely auto factory in Ningbo, China, Thursday June 9, 2005. Little-known Geely and fellow Chinese upstart Chery Automotive are gearing up for expansion overseas, having seen sales of their compact cars soar in China at a time of slowing growth for bigger automakers like Volkswagen and Toyota. (AP Photo/Eugene Hoshiko)

HSBC's China Purchasing Managers' Index (PMI) rose to 55.4 from 55.0 in September, marking the seventh month in a row that the index, compiled by British research firm Markit, has been above the watershed of 50 that divides expansion and contraction.

The improvement in the reading essentially mirrored that of the PMI produced for the National Bureau of Statistics, released on Sunday, which also rose to an 18-month high in part on the back of strong export orders.

Together, the reports presented a picture of robust growth for the vast sector, helping support a rebound in oil prices above $77 a barrel despite ongoing concerns over the outlook for the U.S. economy.

"We believe the ongoing strong recovery in the manufacturing sector should gain further momentum in the coming months, hence underpinning strong economic growth in the fourth quarter," Qu Hongbin, chief China economist with HSBC in Hong Kong, said in a statement.

Employment Grows

Employment rose at the sharpest rate in the history of the HSBC survey, which goes back to April 2004 and is designed to provide a timely snapshot of business conditions in industry, boding well for future domestic consumption.

Export orders hit a 28-month high and pre-production inventories rose for the first time since July 2007, offering evidence that growth is starting to find broader footing.

All told, the two surveys point to an acceleration in annual gross domestic product growth to double digits in the fourth quarter, up from 8.9 percent in the third quarter, said Wensheng Peng and Jian Chang with Barclays Capital in Hong Kong.

"While the two PMIs differ slightly regarding the m/m dynamics in some sub-indexes, both point to strong industrial activity, with domestic demand continuing to be the main driver of the growth recovery," they wrote in a note to clients.

Peng and Chang cited monetary policy tightening as a key risk for the economy next year, but added they thought interest rate increases were unlikely before the second half of next year.

Andy Rothman, China Macro Strategist, with CLSA in Shanghai, said he saw no signs that policy tightening was necessary or imminent, despite the improvement in manufacturing.

"We expect Beijing to continue to gradually reduce the level of stimulus, but there should be no tightening measures until mid-2010 at the earliest," he said in a statement.

Important for countries in the region that export raw materials and components to China, both PMIs showed that the quantity of purchases by manufacturers continued to gather pace.

Input buying rose to its second-highest level since April 2008, according to the HSBC PMI, as factories geared up for increased production volumes. 

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