China September official factory gauge seen showing 2nd month of growth

[September 27, 2016]  BEIJING (Reuters) - Activity in China's manufacturing sector likely expanded modestly for a second straight month in September, a Reuters poll showed, suggesting the economy is stabilizing thanks to government infrastructure spending and a property market boom.

The official manufacturing Purchasing Managers' Index (PMI) is expected to be 50.4 for September, unchanged from August and above the neutral 50.0 mark separating growth from contraction on a monthly basis, according to the median forecast of 30 analysts polled by Reuters.

Profits earned by China's industrial firms grew the fastest in three years in August with rising sales, higher prices and reduced costs, official data showed on Tuesday.

That data indicated a construction boom helped to drive up demand while capacity cuts for sectors which had production gluts saw rising commodity prices because of reduced supply.

But it also showed that profits remained uneven, as traditional heavy industries with excess capacity such as steel still struggled for growth.

Analysts say the improved performance of industrial firms, rising land sales and some progress on starting public-private partnership infrastructure projects should help keep the growth outlook stable in the short- and medium-term.

Factory activity in China has been hovering around the neutral 50 point mark this year with a mild recovery in the first quarter. The official PMI index unexpectedly rose to show expansion in August after slipping to signal contraction in July.

But economists worry that growth propped up by the housing boom and government infrastructure spending is unlikely to be sustainable in the longer term.

They warn that rising government infrastructure spending will further squeeze private investment growth, which accounts for 60 percent of overall investment and has shrunk to record lows this year.

PROPERTY BOOM PEAKING?

While property investment unexpectedly rose at a modest pace in August, showing investor confidence, sharply rising home prices have caused a severe overheating in bigger cities, leading more of them to impose stricter cooling measures to prevent asset-price bubbles. Many fear that the property market boom is peaking.

An employee works at a steel factory in Dalian, Liaoning Province, China, June 27, 2016. REUTERS/Stringer

On the other hand, as Beijing vows to quicken the pace of industrial capacity cuts after falling behind earlier in the year, the risks of more layoffs and debt defaults are rising.

Debt has emerged as one of China's biggest challenges, with the total load rising to 250 percent of gross domestic product (GDP) last year, with corporate debt rising steeply to around 170 percent of GDP.

China's central bank is unlikely to resort to more monetary easing soon, with policymakers already worried about possible property and bond market bubbles. Forcing more money into the system could boost already high debt levels and increase speculative activity.

The official September manufacturing PMI data will be released on Oct. 1, along with the official non-manufacturing PMI.

Services continued to expand robustly in August, albeit at a slower pace than in July.

The Markit/Caixin PMI, a private gauge of manufacturing activity which focuses more on small and mid-sized firms, is due on Sept. 30. Analysts expect it to rise marginally to 50.1, from the previous month's reading of 50.0.

(Reporting by Yawen Chen and Nicholas Heath; Editing by Richard Borsuk)

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