HSBC: China Manufacturing Index Hits Seven-Month High

China's manufacturing activity expanded at its strongest pace in seven months in October, British banking giant HSBC said Thursday, adding to evidence the world's second-largest economy is recovering.

HSBC's preliminary purchasing managers' index (PMI) for this month hit 50.9, a significant improvement from September's 50.2 and the highest since 51.6 in March.

The index tracks manufacturing activity in China's factories and workshops and is a closely watched gauge of the health of the economy. A reading above 50 indicates growth, while anything below signals contraction.

The strong performance in October came on the back of "broad-based modest improvements" in the Chinese economy, said Qu Hongbin, a HSBC economist in Hong Kong, in a statement accompanying the data.

"This momentum is likely to continue in the coming months, creating favorable conditions for speeding up structural reforms," he said.

The October PMI reading may help alleviate market concerns over the sustainability of China's recovery.

Growth in July-September hit 7.8 percent year-on-year, snapping two quarters of slowing expansion, according to official data released last week.

The jump was mainly a result of government stimulus since late June that featured increased rail and urban fixed-asset investment, tax cuts and looser monetary policy, analysts said.

But the country's rising inflation and excess market liquidity are limiting room for further monetary loosening, while skyrocketing local government debt and slowing fiscal revenue growth are restricting the scope for more tax incentives, they said.

Bank of America Merrill Lynch economists said the preliminary PMI figure for this month was "better than expected" and positive given the fragile market sentiment.

But they maintained that the recovery may lose some momentum in the fourth quarter, with the government's pro-growth policy stance likely to turn neutral.

"Excessive fear on financial conditions and policy tightening is definitely not justified," they wrote in a research note.

HSBC is slated to announce its final PMI figure for October on November 1.