China's big manufacturers narrowly avoided a contraction in December a survey showed on Sunday, but downward risks persist and suggest the world's second's second-largest economy will need fresh policy support to counter a slowdown in growth.

The official purchasing managers' index (PMI), complied by the China Federation of Logistics and Purchasing (CFLP) on behalf of the National Bureau of Statistics, rose to 50.3 in December from 49 in November.

That indicated a slight expansion in business activity in China's vast factory sector, but the reading was barely above the flatline of 50 that demarcates expansion from contraction which the index fell below in November for the first time since early 2009.

Analysts had expected the official PMI to be at 49.1 in December.

The rebound in the December PMI shows that there will be no big slowdown in the Chinese economy, Zhang Liqun, a researcher with the Development Research Centre of the State Council, wrote in the CFLP statement.

The economy faces downward pressure but there are positive elements that could underpin growth, Zhang sid.

The new orders sub-index rose to 49.8 in December from 47.8 in November while the sub-index for new export orders rose to 48.6 from November's 45.6.

A similar survey on Friday by HSBC and UK-based data provider, Markit, which captures data from smaller factories, inched up to 48.7 in December from a 32-month low of 47.7 in November but still signaled a modest contraction in activity on the month, reinforcing the case for pro-growth policies.

Economists at Citi believe a policy response is growing ever more likely to combat what the bank believes is a tangible slowing of economic activity.

Accumulating evidence of economic weakness would herald more policy easing in the months ahead, starting with another RRR cut by the Chinese New Year, they wrote in a client note, citing risks to growth from the euro zone, property prices, industrial production (IP) and fixed asset investment (FAI).

Although domestic consumption held up steadily, its contribution may have been more than offset by weakened investment activity and deteriorating foreign trade conditions. We estimate that GDP has grown by 8.5 percent year on year during Q4 and 9.1 percent for the entire year, they wrote.

IN THE SPOTLIGHT

China's central bank is in the spotlight with widespread speculation in financial markets that it will soon unveil a cut in the required ratio of reserves (RRR) it demands commercial lenders hold, after cutting it by 50 basis points on November 30 from a record high of 21.5 percent.

Such a move would free up funds that could be used for lending to support growth, but China's leaders remain wary of relaxing their grip too soon on inflation, the annual rate of which remained stubbornly above the 4 percent target through 2011 and hit a three year of 6.5 percent in July.

The official survey showed that a significant drop in price pressures in November did not follow through to December. The prices sub-index of the official PMI rose to 47.1 from 44.4 in November.

Still, Chinese officials have warned that demand-destroying effects of Europe's debt crisis and weakness in U.S. consumption could put more pressure on Chinese exporters in coming months and have pledged to fine-tune economic policy settings in response.

Analysts expect Beijing to ease monetary policy and step up fiscal spending to bolster the vast factory sector which supports an estimated 220 million Chinese jobs.

Overall, the economy is weakening and it's still too early to tell any clear signs of recovery at this stage, said Hua Zhongwei, senior economist at Huachuang Securities in Beijing.

He said the central bank could still cut the amount of cash that banks must hold as reserves to underpin growth. Analysts expect the next cut in RRR could come early this month.

Despite the uptick for the official PMI, both it and the HSBC index are stuck near their weakest levels since early 2009, when China took a blow from the global financial crisis.

China's economy is on track to slow for a fourth successive quarter, easing further from the first quarter's 9.7 percent annual growth rate with economists expecting the final three months of the year to have slipped below 9 percent.

Economists polled by Reuters earlier this month forecast the PBOC will deliver 200 bps of RRR cuts by the end of 2012, but refrain from an outright cut in interest rates unless quarterly GDP growth dips below 8 percent.

Economists typically view growth of 7 to 8 percent as the bare minimum needed to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social harmony.

(Reporting by Kevin Yao; Editing by Nick Edwards)

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