The HSBC China Manufacturing PMI, or purchasing managers' index, slipped to 54.4 in December from 55.3 in November as output and new business increased at the slowest pace in three months, the British banking giant said.

But manufacturing activity in the fourth quarter, as a whole, was the strongest since the first three months of the year, it said.

A reading above 50 indicates the sector is expanding, while a reading below indicates contraction.

The data came as the yuan reached the strongest level against the dollar since Beijing vowed in June to loosen exchange rate controls, which a central bank official said Thursday helps cut import costs and curb inflation.

The People's Bank of China set the yuan central parity rate -- the middle of the currency's allowed trading band -- at 6.6229 to the dollar, meaning it has appreciated about three percent against the greenback since June 19.

The gradual appreciation in the yuan has had only a small impact on employment and growth, Sheng Songcheng, director of the PBOC's Statistics and Analysis Department, wrote in an article in the Financial News.

At the same time, it benefits the world's second-largest economy by reducing import costs, easing inflation pressures and prompting Chinese companies to become more competitive, Sheng wrote, according to Dow Jones Newswires.

Despite the gains in the yuan, average input prices rose for the fifth straight month, albeit at the slowest pace in three months, driven mainly by soaring raw material, energy and fuel costs, the HSBC survey showed.

Purchasing managers said their factories were passing on the higher costs to customers by hiking factory-gate prices for products, highlighting the need for further monetary tightening measures, HSBC chief economist Qu Hongbin said.

As a result, output price inflation remained strong.

"Inflation rather than growth still remains as the top policy concern, despite the moderation in December's manufacturing PMI reading," Qu said in a note.

"We expect Beijing to continue relying on quantitative tightening measures to curb inflation ... while modest interest rate hikes are also needed to anchor inflation expectations in the coming months."

Top leaders, mindful of inflation's potential to spark unrest, have been pulling on a variety of policy levers to rein in consumer prices, which rose more than five percent in November for the first time in more than two years.

On Saturday, the central bank hiked interest rates for the second time in less than three months after ordering state-owned banks to keep more money in reserve as they try to stem the flood of liquidity into the economy.

Analysts have blamed Beijing's four-trillion-yuan (586-billion-dollar) stimulus spending over the past two years and excessive bank lending for fuelling inflation.

The government for its part has criticised the United States over its decision to pump 600 billion dollars into the American economy, which Beijing warns could cause damaging fund flows into emerging economies such as China as investors seek higher returns for their money.

The expansion of manufacturing activity this month was fuelled by domestic demand, with only a "modest" expansion in new export orders, the bank said.

HSBC's results are based on interviews with purchasing managers at more than 400 companies.

The results of a government survey of more than 700 firms is expected to be released on Saturday.

earlier related report
China mulls export quotas on rare earth alloys: report
Beijing (AFP) Dec 30, 2010 - China is considering new export quotas on rare earth alloys, a report said Thursday -- a move that would further restrict shipments of the minerals used in a variety of high-tech industries.

The country -- which has a near-monopoly in the industry -- is also mulling separate export quotas for heavy and light rare earths, Dow Jones Newswires reported, citing an unnamed official with knowledge of the plans.

The commerce ministry declined to comment on the report when contacted by AFP.

So far, China has issued a single export quota for rare earths -- 17 elements critical to manufacturing everything from iPods to low-emission cars, wind turbines and missiles.

Beijing has moved to tighten controls over the minerals by cracking down on heavily polluting producers, cutting quotas for overseas shipments and hiking export taxes.

The commerce ministry on Tuesday announced a 35 percent cut in rare earth exports for the first half of 2011 compared to a year earlier, having slashed the quota by 72 percent for the second half of this year.

But the government has so far yet to limit exports of rare earth alloys, which are compounds that include rare earth elements.

Foreign ministry spokeswoman Jiang Yu told reporters on Thursday that China would continue to supply rare earths to the global market but called on other countries with reserves to also "shoulder the responsibility".

Jiang said China was looking for alternative rare earth resources and welcomed "countries with sophisticated technology to provide assistance."

Rare earths are usually categorised into two kinds, giving exporters more incentive to ship the more precious and lucrative heavy rare earths for higher returns. A new split quota would effectively end that practise.

The official did not specify when the new quotas -- which would close loopholes by which exporters can sidestep current regulations -- might be finalised.

Industry officials said China had already stepped up scrutiny of exports of the alloys in recent months, ordering that shipments of those containing more than 10 percent rare earths be reported to customs authorities, the report said.

Japanese firms such as Mitsui & Co. have been massively buying waste glass rich in rare earth elements from China to evade increasingly stiff curbs on the raw minerals, the 21st Century Business Herald said Thursday.

China banned exports of 22 rare earths-rich products including cullet and polysilicon from November, it said.

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