Purchasing Managers Index (PMI), a preliminary readout of the country's manufacturing activity, rose to 50.5 percent in January of 2012, the highest level since October, indicating that a slowdown in the world's second-largest economy may be stabilizing.

The country's PMI stood at 50.3 percent in December, 49 percent in November and 50.4 percent in October, the China Federation of Logistics and Purchasing (CFLP) said Wednesday in a statement on its website.

A PMI reading of 50 percent demarcates expansion from contraction.

The CFLP's sub-index for new orders hit 50.4 percent in January, up 0.6percentage points from December, suggesting that the week-long Spring Festival holiday helped boost the country's domestic consumption.

The sub-index for purchase prices rose 2.9 percentage points from December to hit 50 percent in January, indicating that climbing global crude prices added pressure to manufacturing enterprises' efforts to control costs.

"The pick-up in January's PMI reflected that the country's economic slowdown trend is stabilizing. Stronger indexes for new orders and stocks of raw materials showed that factory production is recovering," said Zhang Liqun, a researcher with the Development Research Center of the State Council, China's Cabinet.

Last month, nine industries, including tobacco and beverage manufacturing, agricultural food processing and food production, enjoyed a PMI of over 50 percent, while sectors including wood processing and furniture manufacturing registered under 50 percent, according to the statement.

The sub-index for new export orders fell to 46.9 percent from December's 48.6 percent, showing that the country's foreign trade remained sluggish. Sub-indexes for imports and employment also contracted last month.

"The new export order sub-index fell mainly because of the shrinking external demand," Zhang said, while warning that the country should pay attention to possible hits from external uncertainties.

The stronger-than-expected PMI will help soothe fears of an accelerating slowdown in the country's economy, said Liu Ligang, director of the economic research department of ANZ Greater China.

Because of flagging export demand and the faltering real-estate sector, China's economy expanded by 8.9 percent in the fourth quarter of 2011, slowing from 9.1 percent in the third quarter, 9.5 percent in the second quarter, and 9.7 percent in the first quarter.

"The January PMI reflected that China is heading for a soft landing and that the country's proactive fiscal policy and more flexible monetary policy have buoyed its manufacturing industry," Liu said.

"If such a situation continues, China's economic growth will beat market expectations in 2012. And we maintain China's growth forecast of 9 percent for the year."

Stronger-than-expected PMI may also provide leeway for the central bank to delay cutting banks' reserve requirements.

The People's Bank of China prefers injecting capital into the financial system via reverse repos rather than through reducing reserve requirements.

The central bank injected 352 billion yuan into the market via reverse repos during the week before Spring Festival holiday, when banks were strapped for capital because companies and individuals withdrew cash for bonuses and shopping.

The country's monetary policy will become more flexible this year to protect against risks from the cooling property market and unsolved Eurozone debt crisis, Liu added.

China's home prices fell in most cities in December, under the weight of government tightening measures to cool the once red-hot property sector, including requiring higher down payment and building more government-subsidized housing.

"Given current economic uncertainties, we believe that the country will cut reserve requirements twice during the first half -- one in March and the other in the early second quarter," Liu said.

In December, the country lowered banks' reserve requirement ratio by 50 basis points for the first time in three years, taking the level to 21 percent for large commercial banks and 17.5 percent for small and medium-sized banks.

The CFLP's PMI is based on a survey of purchasing managers in 820 companies in 20 industries.

China plans to expand the sample size for measuring the PMI from the current 820 companies to around 3,000 companies, the National Bureau of Statistics and the CFLP said Tuesday at a news briefing, without giving a specific timetable for the changes.