The preliminary purchasing managers' index released by British banking giant HSBC Holdings PLC stood at 50.9 in December. The reading is 0.4 points higher than that of November and is the highest for 2012. A reading above 50 means economic expansion.

HSBC's PMI is widely considered by China watchers as one of the most important economic indicators, sometimes even believed to be more accurate than the official PMI compiled by the National Bureau of Statistics.

The data published on Friday is a flash, or a preliminary forecast, compiled based on questionnaires completed by purchasing managers from Dec 5 to 12. Final data for December will be published at the end of the month, which typically falls in a close range with flashes.

The index "shows that economic recovery is gaining momentum supported by improving domestic demand", Qu Hongbin, HSBC's chief economist for China, said in a statement.

The sub-index for new orders stood at a 20-month high of 52.7, reflecting strong domestic demand. The employment sub-index went above 50 for the first time in 10 months. The output sub-index dipped slightly but stayed in expansion territory.

"This is a bit above consensus ... and sustains an upward trend in mood," Dariusz Kowalczyk, a senior economist and strategist with Credit Agricole CIB, wrote in a research note.

"Clearly, growth momentum is improving, but remains modest by historical standards."

The PMI data is consistent with his expectation that GDP growth will accelerate in the fourth quarter to 2.4 percent quarter-on-quarter, and 7.9 percent year-on-year, putting the annual growth rate at 7.7 percent.

Kowalczyk's forecast was supported by a jump in electricity consumption last month.

The National Energy Administration said the nation consumed 7.6 percent more electricity in November than in the same period last year.

The service sector, in particular, saw an increase of 12.4 percent, reflecting consumption gaining strength.

The positive PMI reading excited investors on Friday. The major Shanghai Composite Index jumped 4.32 percent, or 89.15 points, to close at 2150.63 points. The index reached its highest point since Aug 10 and posted the biggest single-day gain in percentage points since Oct 9, 2009. Hong Kong's benchmark Hang Seng Index ended 0.71 percent higher.

The data also creates a positive mood ahead of the upcoming annual Central Economic Work Conference, where China's new leadership is expected to assess economic conditions and set priorities for next year's economic work.

The sub-index of new export orders was one of a few sub-indexes that registered a reading below 50, in line with economists' expectations that the country's exports will remain lackluster in December and into 2013.

November's exports grew only 2.9 percent year-on-year, down sharply from 11.6 percent in October. Total foreign trade expanded 1.5 percent in the month, making it effectively impossible to meet the full-year growth target of 10 percent.

Exporters are feeling the pinch from weak overseas demand, and some of them have already started to react.

"Many leather manufacturers in our city are turning their attention to the domestic market," said Zheng Yi, general manager of Chaofan Leather Co in Guangzhou, Guangdong province.

Weak exports have pushed his company to turn to the domestic market this year, Zheng said.

"Our sales in the European market remain stable this year. But we will have a cautious approach to the international market next year and we see huge potential in the domestic market," Zheng said.

Guangzhou Powerland Bags & Leathers Co has also shifted its focus to the domestic market this year.

"We have developed some 200 outlets in the domestic market," said Ouyang Xiaojun, an administrative director with Powerland.

Li Zhongjian, manager of Wenzhou-based Zhejiang Tung Fong Light Industrial Co Ltd, said: "Exports have been severely affected by the crisis in Europe in the past year, and there is no obvious sign that orders will recover at the beginning of next year."

Li added the number of orders won by his company is expected to decline 20 percent in 2012 compared with the previous year.

Zhou Mingwang, owner of Yiwu Mingwang Jewelry, a small export enterprise in Yiwu, Zhejiang province, said: "We have been struggling with sharply declining overseas demand and the rising costs of materials and labor required for production since the middle of last year."

Zhou added that orders from Europe have fallen by about 15 percent in the past three quarters, and it appears likely that they will continue to decline. He has cut the number of the company's production lines from five to three since the end of last year.

Bank of China Ltd, one of the "Big Four" lenders, said in a report on Thursday that it expected 8 percent growth in 2013, which will count on consumption and investment, with exports playing little role.

"Domestic demand, especially consumption, will be the long-term growth engine, while investment pivots short-term growth."

A survey published by Web portal 163.com this week, which polled 100 economists, showed that 18 percent expect China's economic growth to be more than 8 percent in 2013, while 75 percent expect growth will be at least 7 percent.