By Mark Magnier

BEIJING--China's industrial sector picked up last month, with an official gauge of factory activity rising to its highest level in two years, driven by higher commodity prices and a property boom that are stabilizing the wobbly economy.

China's official manufacturing purchasing managers index increased to 51.2 in October from September's 50.4, the National Bureau of Statistics said Tuesday. The reading, the third straight month of expansion, beat a median forecast of 50.3 by 11 economists polled by The Wall Street Journal. The index has remained at or above the 50 mark that separates expansion and contraction for seven out of the past eight months.

The improvement appeared broad-based: subindexes for new orders and production all rose. An official index for nonmanufacturing activity also edged up, to 54.0 in October from 53.7 in September. A competing private gauge, the Caixin manufacturing PMI, also leapt higher, to 51.2 in October from 50.1 in September, Caixin Media Co. and research firm Markit said Tuesday.

Stock markets in Shanghai and Shenzhen rose in midmorning trading, boosted by the signs of stronger economic activity.

October's readings reinforce signs that fiscal spending and easy money continue to steady the world's second largest economy after years of growth gliding downward, economists said. They said the resulting boom in real estate and higher commodity prices may not be sustainable next year.

"Property has helped the economy and we're seeing a lot of speculation in commodities," said Commerzbank AG economist Zhou Hao. "But this is not a turnaround. It just confirms stability and that the economy is not as risky as earlier expected."

Higher prices for coal and iron ore helped to push up the manufacturing index last month, which rose to its highest level since July 2014. While higher commodity prices are good for raw material suppliers, they could hurt factory owners down the road, said RHB Group economist Zhang Fan. "I think it's more likely a one-off jump," he said.

China's leadership, at the monthly meeting of the decision-making Politburo last Friday, expressed concern about asset bubbles. Economists said while they don't expect China to tighten monetary policy outright, the central bank is likely to try to restrain credit growth in other ways in coming months, even as fiscal spending continues.

In a bid to dampen speculative pressure in a property market that has seen price increases of more than 40% year-over-year in some cities, local governments in recent weeks have rolled out selective mortgage and other restrictions. Thisappears to be having some impact. In the first three weeks of October, the volume of property deals increased by 7.9% month-over-month in 30 major cities compared with more than double-digit growth in previous months.

Stimulus-fueled growth, however, is doing little to address the mounting corporate-debt load and excess industrial capacity that have weighed on the economy in recent years, economists said.

Corporate debt now totals around 145% of gross domestic product, according to the International Monetary Fund, up nearly a third since the global financial crisis. Oxford Economics estimates that excess capacity for industry as a whole is around 12%, mostly concentrated in heavy industry and mining. "Progress with cutting overcapacity remains underwhelming," it said in a report.

Liyan Qi contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

November 01, 2016 00:35 ET (04:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.