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China Factory Activity Stronger Than Expected in May

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China's official PMI rose to 50.8 in May from 50.6 in April, data showed on Saturday, beating market expectations and raising optimism that the world's second-largest economy may be stabilizing.

Investors will get a fuller picture of the Chinese economy on Monday when the official services PMI is released along with the final HSBC survey that focuses on smaller private sector firms in the country.

The official purchasing managers' index (PMI), issued by the National Bureau of Statistics and China Federation of Logistics and Purchasing, indicated activity in China's vast manufacturing sector picked up slightly in May.

The reading was stronger than market expectations of 50.1 in a Reuters poll. A reading above 50 indicates expanding activity while a reading below that level points to a contraction.

"The slight pick-up in May PMI reinforces signs of stabilizing of the economy," Zhang Liqun, an economist at the Development Research Center, a top government think tank in Beijing, said in an emailed statement accompanying the index.

(Read More: China's Economic Outlook Just Keeps Getting Worse)

China's annual economic growth slowed to 7.7 percent in the first quarter from 7.9 percent in the previous quarter, despite a credit boom fueled by the thriving shadow financing.

A sub-index measuring new orders inched up to 51.8 in May from 51.7 in April, indicating stronger demand for Chinese goods. A sub-index of new export orders also edged up to 49.4 from 48.6.

Saddled with excess capacity, China's factories are struggling against weak demand, as Beijing's campaign against extravagance among state officials takes a toll on domestic consumption.

A flash private PMI survey released last week by HSBC showed China's manufacturing sector shrank for the first time in seven months in May as new orders fell, an unexpectedly poor outcome that caused a rout in global financial markets.

(Read More: China Stocks Are May's Best Performers)

The official PMI, which focuses on big and state-owned firms, has been generally rosier than the private survey, which targets small and private companies.

The International Monetary Fund this week cut its 2013 economic growth estimate for China to 7.75 percent from 8 percent, while the OECD slashed its 2013 growth forecast to 7.8 percent from a previous forecast of 8.5 percent.

Many private economists have lowered their estimates following soft factory output and investment performance data for April and weak factory activity in May.

The economy's lack of vigour could make it difficult for the government to meet its 7.5 percent growth target for this year, analysts said.

Chinese leaders are reluctant to roll out fresh stimulus steps to support the economy, as they fear increased state spending could lead to a further acceleration of credit expansion and fuel a property bubble.

Premier Li Keqiang said last month that China has limited room to use government spending and policy stimulus to boost its economy, though Beijing has been pushing structural reforms in put the economy on a sounder footing.

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