BEIJING (Reuters) - China's vast manufacturing sector expanded in December at its fastest pace in 14 months as new orders and employment rose, a survey showed on Friday, adding to evidence of a pick up in the economy that helped to boost market sentiment.
The HSBC flash purchasing managers' index for December rose to 50.9, the highest level since October 2011 and the fifth straight monthly gain. A figure above 50 indicates that growth is accelerating, while one below 50 shows slowing growth.
The flash survey -- issued earlier in the month than usual ahead of the Christmas holidays -- provides a further sign for leaders meeting this weekend to chart an economic policy course for 2013 that Chinese growth is reviving.
Growth had slowed for seven consecutive quarters to 7.4 percent in the third quarter. Although it is expected to quicken slightly in the fourth quarter, China is on track this year for its slowest full-year GDP expansion since 1999.
The improved conditions were primarily driven by domestic demand, said Hongbin Qu, China chief economist at HSBC. The new export orders index fell, adding to the surprisingly weak export growth in November customs figures to suggest China faces "external headwinds", he said.
"This calls for Beijing to keep an accommodative policy stance to counter-balance the external weakness, provided inflation stays benign," Qu said.
Most sub-indexes improved, although like new export orders, output also dipped, possibly reflecting softer end-of-year orders. Encouragingly, a sub-index on overall new orders rose for the fifth month in a row to 52.7, its highest level since April 2011.
The PMI helped steady nerves in Asia's shares markets where investors are worried about a lack of progress in U.S. talks aimed at averting a fiscal crisis. The Shanghai Composite Index .SSEC jumped more than 4 percent, although the gain was fuelled largely by speculation of state-backed buying of mainland markets.
The PMI figures also pointed to some improvement in margins for manufacturers as a sub-index tracking output prices rose while one tracking input prices fell. A sub-index on employment rose to its highest level since February.
"Clearly, growth momentum is improving but remains modest by historical standards," Dariusz Kowalczyk, a Credit Agricole strategist said in a research note. "The data highlights a lack of need for more stimulus and should be well received."
The Chinese government will hold a planning meeting this weekend, which will set economic policy for the coming year, sources said.
It is expected to keep to the 2012 growth target of 7.5 percent in 2013, a lower trajectory than in recent years as the government tries to factor in some economic wiggle room to reduce the country's export reliance in favor of domestic consumption.
Earlier on Friday, the State Information Center, a government-backed think tank, called for Beijing to expand its fiscal deficit in 2013 and broaden out value added tax reforms to support the economy and offset export weakness.
Government data earlier this week showed industrial production growth in November jumped to an eight-month high while inflation ticked up from 33-month lows.
The data added to the view that a long slide in economic growth was over, although exports suggested a recovery will be bumpy.
"We can not pin hopes that the growth rate will pick up to 10 percent as in the past," said Xia Bin, an economist at the Development Research Centre, a cabinet think tank.
Exports growth slipped to less than 3 percent annual growth compared with 11.6 percent in October. That could hit the firms concentrated in China's coastal export hubs, where private firms account for much of new hiring and new government revenues.
China's central bank cut interest rates and bank reserve requirements and lately used money market operations to try to support the economy as it slowed down.
It also fast-tracked approvals for infrastructure projects.
Credit has loosened as money flows through channels outside the traditional state-controlled banks, such as trust loans and corporate bonds.
Total social financing -- China's measure of credit available in the economy -- is on course to hit a record of 15 trillion yuan this year, up 17 percent from 2011.
However, the November total slipped compared with October, raising another doubt about the strength of the rebound.
"These figures underline that the credit loosening that has helped fuel the economic rebound of recent months is still far more tentative than in earlier expansions," Capital Economics analyst Qinwei Wang said.
The diversification of funding sources may help smaller businesses but alarms critics and banking industry executives, who warn that there is very little transparency on where the loans are going. Lower-interest bank loans and depositors' savings are also flowing into shadow banking as part of a broad arbitrage between the official and gray-market interest rates.
(Editing by Jonathan Standing and Neil Fullick)