China's factory activity unexpectedly swung to growth in May from decline, a private sector survey showed on Thursday, driven by improved production and demand, helping struggling firms that have been hit by slumping profits.
The Caixin/S&P Global manufacturing purchasing managers' index, or PMI, rose to 50.9 in May from 49.5 in April, above the 50-point index mark that separates growth from contraction.
China's recovery from its strict Covid curbs has been fragile and uneven, with economic indicators for April showing imports, factory gate prices and property investment all falling.
"We need more time to see whether the improvement would be sustained, but it is a piece of good news for the Chinese economy," Zhou Hao, economist at Guotai Junan International, said in a note.
"Further policy support is still required to boost domestic demand, we reckon a 10 bps MLF rate cut in June," he added.
The manufacturing subindexes showed factory output rose at the fastest clip in 11 months while new orders including new exports expanded in May.
Chinese stocks rose after the better-than-expected PMI data, with the mainland's benchmark CSI 300 and Hong Kong's Hang Seng up roughly 0.6% each.
However, business confidence for the coming 12 months fell to a seven-month low amid concerns over global economic prospects.
Firms, grappling with a slump in industrial profits in April, remained cautious about hiring, with the employment subindex shrinking for the third consecutive month in May.
Insufficient demand is the main constraint for the recovery and deflation risks are rising in the world's second-biggest economy, analysts say.
The input and output price gauges continued to decline in May.
"Current economic growth lacks internal drive and market entities lack sufficient confidence, highlighting the importance of expanding and restoring demand," said Wang Zhe, Senior Economist at Caixin Insight Group.
Further monetary policy easing is expected by some economists.
"The central bank will likely cut the reserve requirement ratio by 25bps to maintain financial stability, in our view," said ANZ in a research note on Wednesday. "The likelihood of frontloading the rate cut is also rising."
The Caixin PMI is believed to focus on more export-oriented and small firms in coastal regions and is compiled by S&P Global from responses to questionnaires sent to purchasing managers in China.