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BEIJING (Reuters) - China's manufacturing sector contracted for a third consecutive month in September, suggesting that the world's second-largest economy is not immune to global headwinds, while factory inflation quickened.
Growing signs of a slowdown in China have prompted concerns that the country that has been the motor of global growth in recent years will not be able to provide as much of a counterweight to faltering U.S. and European growth.
The HSBC purchasing managers' index (PMI), which previews business conditions in a range of industries before official output data, was at 49.9 in September, unchanged from August. The final PMI, released on Friday, was stronger than the flash reading published last week.
"The PMI reinforces our view that the potential slowdown in China's economy will likely be a gradual," said Connie Tse, an economist at Forecast in Singapore.
"The trade sector no doubt faces increasing risks, but recent export growth momentum is holding up decently. China is not facing a collapse in global demand yet, as witnessed in 2009."
The latest reading represents the longest period of contraction since the global financial crisis, when it came in below 50 for eight successive months from August 2008.
In PMI releases around the world, the 50-point level typically demarcates expansion from contraction in factory activity.
HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13 percent in industrial output and a 9 percent expansion in gross domestic product.
"Although the lagged effects of credit tightening will continue to cool industrial activity in the months ahead, there remains little need to worry about a growth meltdown," said Qu Hongbin, China economist at HSBC.
Qu expects China's economic growth to hold up at around 8.5-9 percent in the coming years, despite the global slowdown.
But analysts at Bank of America-Merrill Lynch said in a report that China faces some systemic risks such as a property-market meltdown, bad debt and capital outflows. The warning triggered some widening China's sovereign credit default swaps.
The China Enterprise index .HSCE of top mainland firms listed in Hong Kong fell 4 percent on Friday, with banks and developers sold off on fears of a property market correction..HK
There are also concerns in some quarters that, after an investment splurge, China does not have the fiscal flexibility it possessed in 2008 and is less able to shrug off weakness elsewhere -- a factor cited by consultancy Capital Economics when it last week cut its 2012 growth forecast to 8.5 percent from 9 percent.
Earlier this month the IMF warned that, without action, the debt-mired economies of Europe and the United States could lapse into recession, prompting it to cut its 2011 and 2012 global growth forecast to 4 percent.
Underscoring the global slowdown, a Japanese PMI survey on Friday showed September marking the first contraction in manufacturing activity in five months, as a bounce following a March earthquake in Asia's second biggest economy faded.
China, which has become a factory to the world, is especially vulnerable to fading demand from the United States and Europe, still its two biggest export markets despite its effort to diversify.
Recent weakness in China's currency against the dollar, where the offshore yuan is trading at a rare steep discount against the onshore rate, is evidence of overseas investors' concerns about the outlook, analysts say.
The HSBC survey's new export orders sub-index remained below 50 for a fifth straight month, while the sub-index for overall new orders hovered below 50 for a second successive month.
China's exports in August pulled back from a record high and the pace of expansion slowed from the 37.7 percent rate recorded in January, government data showed.
China's annual growth tumbled to 6.6 percent in the first quarter of 2009 as exports took a hit from a slump in global trade.
This time the slowdown so far has been modest and gradual, due to resilient domestic demand. Analysts believe China's annual economic growth in the third quarter will be above 9 percent, slowing moderately from 9.5 percent in the second quarter.
China's official PMI, which is due to be published on Saturday, may have edged up in September, after a rise in the previous month from a 28-month low in July, driven by seasonal factors and domestic demand.
The official PMI, which is weighted more toward big state firms, generally paints a rosier picture of Chinese factories than that of HSBC, which includes small private firms that have been hit harder by credit curbs and weaker demand.
To the discomfort of Chinese policymakers, Friday's data showed input costs rising rapidly, which could imply upward pressure on consumer inflation.
Factory inflation in China quickened markedly in September, with the sub-index for input prices climbing to a four-month high of 59.5 in September from 55.9 in August.
China's annual inflation pulled back to 6.2 percent in August from a three-year high of 6.5 percent in July, and is widely expected to cool steadily for the rest of 2011.
"The upstream price rises could trickle down to consumer prices at some point, but the impact won't be big as global commodity prices have been falling," said He Yifeng, economist at Hongyuan Securities in Beijing.
Chinese leaders have repeatedly emphasized that fighting inflation remains the top priority despite the global malaise.
The central bank is holding off further policy tightening amid jitters about a global downturn. But at the same time, it is unlikely to ease policy soon for fear of reigniting price pressures and an investment frenzy by local governments.
Since last October, the central bank has raised interest rates five times and banks' reserve requirement ratios -- the percentage of cash deposits they must set aside in their vaults -- nine times.
Editing by Alex Richardson and Ken Wills