China's factory sector expanded slightly in January, confounding expectations for a contraction and supporting hopes the world's second-biggest economy will avoid a hard landing, a government purchasing managers' index showed.

A similar HSBC survey showed the sector contracting the least in three months, further backing the view that a downturn in manufacturing may be bottoming out as the government adopts modest measures to support growth.

The official PMI rose to 50.5 in January from 50.3 in December, beating market expectations of 49.5 as new orders rose to a three-month high. A level of 50 demarcates expansion from contraction.

This suggests that the manufacturing sector has stabilized somewhat due to supportive fiscal and monetary policies, said Li-Gang Liu, China economist at ANZ in Hong Kong.

Indeed, the stronger-than-expected PMI supports our baseline scenario of a soft landing.

The Australian dollar gained a third of a cent on hopes that the higher-than-expected government PMI would support Chinese demand for the country's commodities.

January PMI continued to pick up slightly from the reading of December, indicating that the economic slowdown trend is gradually stabilizing, Zhang Liqun, a researcher with the Development Research Centre of the State Council, said in the official statement.

The improvement in both new order and stock of purchase sub-indexes reflected the factory production is recovering. But the new export order sub-index dropped last month, showing that the external demand is shrinking and we should pay high attention to the possible hit from external uncertainties.

The central bank is shifting towards a looser policy stance to ward off a sharp growth slowdown, although lingering inflation concerns point to a gradual move. Fiscal policy remains expansionary this year.

The official sub-index for new orders rose to 50.4 in January, its highest since October, from 49.8 in December.

However, reflecting a sluggish global economy and fears of recession in Europe, new exports orders fell for the fourth month running. The index dropped to 46.9 from December's 48.6.

The HSBC PMI stood at 48.8 in January -- broadly in line with its initial reading before China's Lunar New Year holiday.

It marked a slight improvement from 48.7 in December, but HSBC Chief China Economist Qu Hongbin said the data showed more government support was needed for the economy.

The final results of January's PMI survey confirmed the still weak growth momentum of manufacturing activities into the New Year, Qu said in a statement.

This calls for more aggressive easing measures to support growth, given that inflation is no longer a concern, he said.

HSBC said the areas of concern in the PMI overshadowed the bright spots. The overall output index pointed to a faster contraction in January than in December -- reflected in a purchasing index, which sank to a near three-year low.

HSBC indexes measuring new export orders and backlogs of work all rose and pointed to growth. The new orders index rose, but remained below 50, suggesting contraction.


The PMIs are bouncing around their weakest levels in three years.

China's Finance Minister Xie Xuren highlighted increasing risks to exporters from weakening overseas demand, in remarks published on Wednesday.

As external demand is now clearly fading, Chinese exporters are facing increasing difficulties, he said.

The official PMI, which is weighted more towards big state firms, generally paints a rosier picture of Chinese factories than a PMI produced by HSBC, which includes small private firms that have been hit harder by credit curbs and weaker demand.

Despite the uptick in the official PMI, most economists expect China's economic growth to slow further in the first quarter, dragged down by weak exports and a slowdown in the rate of property investment.

HSBC's Qu believes economic growth in the first quarter of 2012 will slow down to as little as 8 percent, which would be the weakest pace in almost three years, from 8.9 percent in the fourth quarter of 2011.

A Reuters poll forecast first-quarter growth of 8.2 percent, which it projected would be the low point of the year. However, full-year growth would still slowdown to 8.4 percent, the weakest in a decade.

In a nod to growth concerns, the central bank announced a cut bank reserve requirement ratios (RRR) -- the first such cut in three years -- at the end of November.

More reserve cuts are expected in coming months to support growth, although the central bank has been injecting more cash into the banking system through its money market operations.

(Additional reporting by Nick Edwards: Editing by Neil Fullick and Ken Wills)