BEIJING: China's manufacturing activity expanded in January at its fastest pace in two years, HSBC said on Thursday, the latest sign of recovery in the world's second biggest economy.

The British banking giant's preliminary purchasing managers' index (PMI) reached 51.9 for this month, up from a final 51.5 in December. The January figure is the highest for 24 months.

The index, compiled by information services provider Markit and released by HSBC, tracks manufacturing activity and is a closely watched barometer of the health of the economy. A reading above 50 indicates expansion.

It only returned to positive territory in November after 12 consecutive months of contraction.

Qu Hongbin, a Hong Kong-based economist with HSBC, said improving domestic demand had encouraged Chinese manufacturers to increase production, although foreign markets remained sluggish.

“Thanks to the continuous gains in new business, manufacturers accelerated production by additional hiring and more purchases,” he said.

“Despite the still tepid external demand, the domestic-driven re-stocking process is likely to add steam to China's ongoing recovery in the coming months.”

China's economy expanded 7.8 per cent last year in the face of weakness at home and in key overseas markets, its lowest annual figure since 1999.

But it grew 7.9 per cent in the final three months of 2012 from a year earlier as industrial output and retail sales strengthened, snapping seven straight quarters of slowing growth.

The People's Bank of China, the country's central bank, last cut interest rates in July last year, and has instead used open market operations to boost liquidity to support the economy.

Last week, the central bank said it would start carrying out short-term operations to manage liquidity in the money market, which analysts say will give policy-makers more flexibility.