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China factory activity has best showing in 5 months

China's factory activity turned in its best performance in five months in May, a private survey showed on Thursday, raising hopes that recovery in the world's second-biggest economy is gaining traction.

The flash Markit/HSBC Purchasing Managers' Index (PMI) came in at 49.7, better than the 48.1 final reading in April, but still shy of the 50-mark that demarcates expansion from contraction.

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The news prompted a gains across major share markets across Asia, with the Nikkei rising more than 2 percent. The Australian dollar, typically sensitive to Chinese data due to the huge trade links between the two countries, surged around quarter of a U.S. cent, rising to as high as $0.9273.

A breakdown of the data showed improvements across various indices. New export orders, a proxy for foreign demand, showed the biggest jump, climbing 3.4 points to 52.7, its highest level in more than three years.

Mark Ralston | AFP | Getty Images

Market watchers say while the news is positive, it isn't entirely unexpected.

"Since the start of the year there have been programs to stimulate investments into the small-and-medium enterprise sector, " Li Daokui, an economist at Tsinghua University and a former adviser to China's central bank, told CNBC on the sidelines of a UBS conference in Singapore.

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"Among many signals, I believe this (the HSBC PMI) is one of them indicating that the economy is gradually stabilizing," he added.

Others flagged the fact that the manufacturing sector remains stuck in contraction, and has been for five months now.

"The main thing we'll be taking from this is the fact that it does remain below that threshold between expansion and contraction so number of 49.7 might have beat expectations still is consistent with contracting manufacturing sector in China," Hamish Pepper, currency strategist with Barcays.

Beijing in recent months embarked on a series of so-called "mini-stimulus," ranging from infrastructure spending to lower taxes for small businesses, in a bid to arrest a slowdown in the world's second largest economy.

China's economy grew an annual 7.4 percent in the first quarter of this year, slowing from a 7.7 percent increase in the last quarter of 2013.

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According to John Taylor, professor of economics and finance at the National University of Singapore, while the data is reassuring, it won't be smooth sailing from here given China's push to rebalance away from investment and exports and towards domestic consumption.

"I think generally speaking there are going to be some more adjustments in China – the reforms are important, they're going to have some adjustments. I think it's good news but this is one piece of information along with all the other stuff that's coming out," Taylor said.

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