China official factory PMI seen dipping in December

BEIJING (Reuters) - Growth in China's factory activity may have pulled back slightly in December, a Reuters poll showed, reinforcing views that the world's second-largest economy could lose some steam at the year end while Beijing is shifting its focus to structural reforms.

China's official manufacturing purchasing managers' index (PMI) likely eased to 51.2 in December, down a touch from November's 51.4, according to the median forecast of 11 economists in the poll.

A reading above 50 indicates expanding activity while one below that level points to a contraction.

A preliminary PMI survey released in the middle of December by HSBC and Markit Economics showed that the factory sector activity grew at the slowest pace in three months due to subdued output.

Analysts said lacklustre data for power and steel output in the first 20 days of December also signalled soft demand both at home and abroad.

"Most manufacturers tend to keep their purchase stocks at low levels to hedge against uncertainties, as they can mainly get short-term external orders while domestic demand is not particularly strong," said Nie Wen, an analyst at Hwabao Trust.

He added that tight liquidity conditions in the money market and rising funding costs in the real economy also crimped investment appetite from domestic firms.

China's money market rates soared late last week to the highest level since a cash crunch in June, as the central bank engineered a tight stance to push banks to improve their asset and liability structure.

The money market squeeze was later eased after the central bank injected cash and fiscal deposits entered the banking system.

But officials and bankers agreed that China's borrowing costs would have a tendency to go upwards in the longer-term, as Beijing moves towards a market-based interest rate regime.

Apart from downside risks in the domestic economy, China is still facing external headwinds, with trade growth in 2013 set to miss the annual target of 8 percent, according to an estimate given by the Commerce Minister Gao Hucheng On Friday.

Economists say the economy is likely to show weaker momentum in the final quarter, after a rebound between July and September, due to slowing credit growth and a fall in restocking demand.

But any slowdown could be modest in December, given still rising prices of cement and other building materials, an indication that infrastructure and property investment remain robust.

The official PMI is weighted more towards bigger and state-owned enterprises and tends to paint a rosier picture than the HSBC/Markit private survey, which focuses more on smaller firms and those in the private sector.

The official PMI figures will be released on Wednesday, January 1 at 9:00 am (0100 GMT). The final HSBC/Markit PMI is due on Jan 2 at 9:45 am.

(Reporting by Aileen Wang and Jonathan Standing; Editing by Kim Coghill)