Oct. 1 (Bloomberg) -- China's manufacturing expanded for the first time in three months, indicating the economy is weathering a global slowdown.

The Purchasing Managers' Index rose to a seasonally adjusted 51.2 in September from 48.4 in August, the China Federation of Logistics and Purchasing said today in an e-mailed statement.

To combat four straight quarters of slowing economic growth, China has since July loosened loan quotas, encouraged lending to small businesses and increased export-tax incentives for makers of garments and textiles to boost growth and protect jobs. The central bank last month cut borrowing costs for the first time in six years and has trimmed the pace of yuan gains.

``The recovery indicates that any dip in China's economic growth won't be deep,'' Zhang Liqun, a senior research fellow at the State Council's Development Research Center, said in the statement. ``Starting in July, the macro policies have been fine tuned and domestic consumption was strong since then, with investment and exports stable.''

Started in January 2005, the survey tracks changes in output, new orders, employment, inventories and prices.

The output index rose to 54.6 in September from 48.7 percent in August, while the index of new orders climbed to 51.3 from 46. The index of export orders increased to 48.8 from 48.4, the statement said.

Markets in China and Hong Kong were closed today for a holiday.

Pace of Yuan Gains

China's central bank has signaled that it may slow the pace of the currency gains, according to David Hale, chairman of Hale Advisors. The yuan appreciated 0.1 percent against the U.S. dollar in the third quarter, compared with the 6.6 percent increase in the first half.

Rising domestic consumption may help shield China's manufacturers from weaker exports. Retail sales grew 23.2 percent in August from a year earlier, close to the fastest pace in at least nine years. Fixed-asset investment in Chinese urban areas jumped 27.4 percent in the first eight months of 2008, up from 26.7 percent in the same period last year.

``China is not just sitting around, waiting for orders for Christmas toys and mobile phones from U.S. retailers,'' said Carl Weinberg, chief economist at High Frequency Economics Ltd. in New York. ``The boom in China's trade has been nice icing, but China's economic cake is baked at home.''

To contact the reporters on this story: Luo Jun in Shanghai at jluo6@bloomberg.net;

Last Updated: September 30, 2008 21:25 EDT