paulmathew, you refer to :-
born in the United Kingdom who have lived there for at least the first 10 years of their life;
-: and that wording clearly relates to a section 1(4) application. But TG1212's child will be applying under section 1(3).
I too would be interested to learn why you think your child is currently stateless. One is not stateless simply because a passport has not been issued. Many people around the world do not have a valid passport, but that does not mean that they do not hold citizenship. For example many British Citizens living in the UK do not have a valid in-date passport, but that does not make them any less British.