China's manufacturing sector expanded for the first time in four months in February, a private survey showed on Wednesday, surprising investors who were expecting a contraction.
The flash HSBC Purchasing Managers' Index (PMI) rose to 50.1 from January's 49.7 final reading, above the 50-mark which demarcates expansion from contraction and better than a Reuters poll expecting a 49.5 print.
Factory activity contracted in both January and December, after stalling in November.
Reaction in markets was positive: the Australian dollar rose against both the U.S. dollar and the yen, while China's Shanghai Composite index pared losses to bounce into positive territory and Hong Kong's Hang Seng index held near the flatline.
But a deeper dive into the data revealed worrying signs. The new export orders sub-index shrank for the first time since April last year, skidding to 47.1, pointing to weak external demand.
Input and output prices also fell, while employment in factories shrank for the 16th straight month.
"Today's data point to a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year period in February," said Hongbin Qu, chief economist of China & co- head of Asian Economic Research at HSBC. "However, domestic economic activity is likely to remain sluggish and external demand looks uncertain."
China's economy grew 7.4 percent in 2014, its slowest pace in 24 years, hurt by a cooling property market, sluggish domestic demand and volatile exports.