BEIJING, April 1 (Reuters) - A rebound in domestic demand boosted activity at Chinese factories in March, a private survey showed on Monday, lending weight to arguments that China's economic recovery would be driven from home this year.
The final HSBC Purchasing Managers' Index (PMI) rose to 51.6, roughly in line with a flash reading of 51.7 and up from February's 50.4. A reading above 50 suggests factory activity accelerated on a monthly basis.
The pick-up was led by a big rise in new orders, the second largest in 26 months, with the index climbing to 53.3 from February's 51.4.
In contrast, new export orders barely grew in March and hovered just above 50, plagued by weakness that has persisted through the first quarter.
Qu Hongbin, chief China economist with HSBC - the survey's sponsor - said while China's resilient local demand would continue to support its economy in coming months, domestic growth is not surging, not with March factory inflation falling for the first time in six months.
"Beijing policymakers should keep a relatively accommodative policy stance in place," Qu said.
China's economy is pulling out of its worst downturn in 13 years, but the rebound has been uneven as unsteady U.S. and European demand for Chinese exports have impeded growth.
The patchy recovery has led analysts to bet that China's central bank will leave interest rates unchanged this year. It cut rates twice by a total of 50 basis points in 2012.
HSBC said the PMI survey showed factories had raised production after booking more business, but remained cautious in their outlook as they paused hiring plans for the fourth consecutive month on a seasonally adjusted basis.
The survey showed factory activity rose in March at its second-fastest pace in two years after seasonal adjustments. Stronger demand drove the rise, manufacturers said, while lower raw material prices, notably steel, cooled factory inflation.
Factories said cost savings in raw materials were passed on to clients due to stiff market competition, dragging output prices to under 50 for the first time in four months.
Although Chinese exports were surprisingly strong in February, jumping by a fifth compared to a year ago, analysts and government officials believe trade remains an Achilles' heel for the world's second-biggest economy this year.
Beijing says it hopes China's trade will grow 8 percent in 2013 - up from last year's 6.2 percent, but down sharply from double-digit expansion rates of over 20 percent in previous years.
Many analysts believe China's mild economic recovery means price pressures will be subdued this year, despite inflation hitting 10-month highs in February as holiday spending for the Lunar New Year caused food prices to spike. (Reporting by Koh Gui Qing; Editing by Kim Coghill and Nick Edwards)