Preview - China March official factory PMI: activity seen contracting at slower pace

SHANGHAI (Reuters) - Activity in China's manufacturing sector likely shrank for an eight straight month in March, but at a slower pace than in February as a reviving property market gave a much-needed boost to sales of steel and other construction materials, economists polled by Reuters said.

The official manufacturing Purchasing Managers' Index (PMI) is expected to rise to 49.3 in March from 49.0 a month earlier, according to a median forecast of 32 economists in a Reuters poll. February's reading was the weakest since November 2011.

Although the forecast rise implies a slower rate of shrinkage, it is still below the 50.0 mark which separates expansion from contraction.

China's factory sector has been in an prolonged slowdown, weighed down by weak global demand for the country's exports and overcapacity in key sectors such steel and basic materials.

Dongbei Special Steel Group Co Ltd, an unlisted steel manufacturer in northeast China, became the latest casualty of the supply glut and weak demand this week. It missed a payment on an 800 million yuan ($123 million) short-term note which matured over the weekend, the Shanghai Clearing House said in a statement on its website on Tuesday.

Nonetheless, signs of a nascent turnaround in the construction sector, driven by strong home sales and bubbly prices in big cities such as Beijing, have recently given some support to steel and other embattled heavy industries.

The National Bureau of Statistics' (NBS) industrial survey for January and February showed industrial profits growing 4.8 percent from a year earlier, reversing seven straight months of decline.

While an NBS official said that the return to growth was partly due to a low base in the same period last year, analysts said that the real estate recovery was also a factor.

"The recovery in property investment has helped industrial profits return to positive growth," Zhang Wenlang, an analyst at CITIC Securities, wrote in a note.

"Looking forward, industrial profits are likely to grow this year thanks to improved household consumption, a recovery in property investment and a halt in the slump in commodity prices."

Some analysts also thought an easing of concerns over capital outflows and the direction of China's foreign exchange policy might also have played a role in reviving business confidence.

"We think some of the January-February strength (in profits) was due to the release of pent-up demand from the second half of last year," Tim Condon, chief Asia economist at ING Bank in Singapore, said in a research note.

"We believe steadier (central bank) policy since the second week of January released the pent-up demand."

China's yuan currency fluctuated sharply against the dollar in December and January amid rising concerns about capital outflows, but it has been relatively stable since the end of the Lunar New Year holiday in mid-February, thanks to heavy intervention by the central bank and the dollar's loss of upward momentum.

The official manufacturing PMI data will be released on April 1, along with the official services PMI.

The Markit/Caixin factory PMI, a private and separate gauge of manufacturing data, will also be released on April 1.

(Reporting By Nathaniel Taplin; Editing by Kim Coghill)