China's manufacturing expanded in July at its fastest rate in a year as domestic demand offset sluggish exports, a survey showed yesterday, highlighting the importance of the central government's huge stimulus in driving the country's economic growth.

Hong Kong brokerage CLSA Asia-Pacific Markets said China's monthly purchasing managers index, or PMI, rose to a 12-month high of 52.8 on a 100-point scale where numbers above 50 indicate an expansion. That was up from June's 51.8.

"Manufacturing activity continues to accelerate and, importantly, orders growth is being driven by the domestic economy," said CLSA economist Eric Fishwick in a statement. "Export prices lag, another sign of China looking inwards for growth."

The survey echoed a report on Saturday by the China Federation of Logistics & Purchasing that showed manufacturing expanding for a fifth month following the plunge in global demand for Chinese goods.

China's economic growth rose in the latest quarter to 7.9 percent over a year earlier, up from 6.1 percent the previous quarter, as the 4 trillion yuan (US6 billion) stimulus pumped money into the economy.

The biggest gains have been in construction and other areas targeted by the government's effort to pump up domestic demand with a massive program of building new highways and other public works. Consumer spending and other private sector activity are lagging.

The PMI is seen by economists as a better measure of China's economic outlook than data such as gross domestic product because it includes forward-looking elements such as orders for future sales. CLSA's index is based on a monthly survey of some 400 companies, while the Chinese federation surveys some 700 companies.

The World Bank raised its 2009 growth forecast for China in June from 6.5 percent to 7.2 percent due to the stimulus measures.

Private sector economists also have raised growth forecasts and say China is likely to be the first major economy to emerge from the world's worst downturn since the 1930s.

CLSA said its measure of manufacturing output rose to 54.6 from June's 53.7. The index of new orders rose to 55.9 from June's 54.6 even though the measure of export orders dropped to 50.2 from June's 50.9.

The employment indicator rose to 51.0 from June's 50.2, indicating that creation of new jobs was lagging.

"Demand for manufactured goods was reported to have centered on the domestic market," the report said.