China's vast factory sector showed signs of steadying in September as export orders climbed, a private survey showed on Tuesday, easing fears of a hard landing but pointing to a still-sluggish economy facing considerable risks.

The final HSBC/Markit Manufacturing Purchasing Managers' Index(PMI) hovered at 50.2 in September, unchanged from the August reading which was a three-month low, but lower than a preliminary reading of 50.5.

A sub-index measuring new export orders, a gauge of external demand, expanded to a 4-1/2-year-high of 54.5, though domestic demand appeared soft. The 50 mark separates expansion from contraction in activity on a monthly basis.

More worrisome, the survey showed further weakness in the job market, with the sub-index for manufacturing employment shrinking for the 11th consecutive month, which is bound to concern China's Communist leaders.

The world's second-largest economy has stumbled this year as a slowdown in the housing market further weighs on softening domestic demand.

With the property market expected to cool further, economists believe policymakers will have to roll out more stimulus measures in coming months to meet the government's 2014 growth target of around 7.5 percent.

"Overall, the data in September suggests that manufacturing activity continues to expand at a slow pace," said Qu Hongbin, chief economist for China at HSBC.

"We think the risks to growth are still on the downside and warrant more accommodative monetary as well as fiscal policies."

Despite the strong surge in export orders, the overall output level fell to its lowest in four months, but managed to hold above the 50-point level.

Shares in Shanghai .SSEC gave up modest early gains and dipped into the red after the report.

WEAK DOMESTIC ECONOMY

Despite a run of weak economic readings, Chinese leaders have said repeatedly that no dramatic change in policy is imminent.

Premier Li Keqiang said earlier this month that China cannot rely on loose credit to lift its economy and would continue to make only "targeted adjustments" to boost activity.[ID:nL3N0RA2IY]

The latest worrying data came at the weekend, with news that profits at China's industrial companies fell in August from a year earlier. Many of the country's biggest firms are already receiving heavy subsidies from the state. [ID:nL3N0RS03I]

A flash PMI by HSBC/Markit that was released last week had showed factory employment skidding to a six-year-low in September. Tuesday's survey showed the sub-index was revised up markedly in the final version, though it showed the labour market was shrinking nonetheless.

A soft labour market is a worry for Chinese policymakers, who fear that rising unemployment could fuel social unrest and threaten the government's grip on power.

"The domestic economy is very weak and is being brought down by the property market," said Tao Wang, an economist at UBS in Hong Kong.

"But until there is clear evidence of weakness in the labour market, the authorities won't be responding," she said in reference to the soft employment data in the PMI.

China will release its official factory PMI on Wednesday. It is also expected to show growth steadied. [ID:nL3N0RR32J]

The official PMI is focused on larger factories that belong to the government, as opposed to the HSBC/Markit PMI survey which is biased towards smaller manufacturers in the private sector.

Smaller firms are facing greater financial stresses as some cash-strapped customers are taking longer to pay their bills. Smaller companies are also having more trouble getting credit as banks grow more cautious in the face of mounting bad loans and fears of defaults.

The Industrial and Commercial Bank of China (1398.HK) (601398.SS), the country's biggest bank, said 80 percent of new non-performing loans in the second quarter came from the manufacturing and wholesale sectors.

China's banking regulator said on Sunday it had issued revised internal control guidelines for banks to ensure that appropriate risk management controls are adopted, while increasing penalties for any violations.

Issuance of the guidelines came days after China's central bank began a targeted program to make available 500 billion yuan ($81.6 billion) in short-term funds to China's five biggest banks to help the economy by keeping borrowing costs affordable.