China's factory sector turned in its best performance in five months in May, a preliminary HSBC survey showed today.

But overall manufacturing growth still contracted slightly in a suggestion that the outlook remains murky.

The HSBC Flash China Manufacturing Purchasing Managers' Index (PMI) recovered to 49.7 in May from April's final reading of 48.1, beating a Reuters' poll forecast of 48.1.

But the data is still below the 50-point level that separates a monthly growth in activity from a contraction, indicating that manufacturers actually experienced a slight drop in business.

A breakdown of the survey results showed the handful of closely-followed indices that measure output, domestic and foreign demand all improved substantially in May to rise above the 50-point mark, from sub-50 levels in April. 

New export orders, a proxy for foreign demand, showed the biggest turnaround. The index climbed a hefty 3.4 points to 52.7, a level not seen in nearly three and a half years.

"The improvement was broad-based with both new orders and new export orders back in expansionary territory. Disinflationary pressures also eased over the month and output prices increased for the first time since November 2013," said Qu Hongbin, chief economist for China at HSBC.

He also noted the employment index fell further to 47.3, which implies that this month's improvement in sentiment has not yet filtered through to the labour market.

Of the 11 sub-indices in the survey, all but those for employment and stocks of finished goods rose compared to April.
In the case of employment, the index fell over a point to stand well under 50, the 13th consecutive month that jobs have been lost in the manufacturing sector.

Any marked weakening in the labour market would raise alarm bells for China's government, which regards healthy employment levels as a top policy priority and an important condition for social stability.

Premier Li Keqiang said in March that it is all right if economic growth comes in slightly below the government's 7.5% target, as long as the job market holds up. 

Hit by unsteady global demand, slowing domestic investment growth and a cooling property market, China's economic growth fell to an 18-month low in the first three months of this year.

Economists polled by Reuters believe growth in the world's second-largest economy will dip to a 24-year-low of 7.3%this year - just ahead of the 7.2% expansion that Premier Li has said is necessary for a robust labour market.

Japanese PMI survey mixed

Japanese manufacturing activity also contracted in May but at a slower pace than the previous month, a similar preliminary survey showed, in a sign of tentative recovery after a sales tax hike in April led to a slowdown in consumer spending.

The Markit/JMMA flash Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 49.9 in May from a final reading of 49.4 in April.

Unlike China, however, the index for new export orders fell to a preliminary 48.2 from a final reading of 49.1 in April.

Exports have been a soft spot for the recovering economy and Japanese policymakers have been counting on a rebound in shipments to offset the expected drop in consumer consumption in the immediate months after the sales tax increase. 

But there is growing evidence that any damage from the tax hike will be limited. A Reuters survey showed companies expect sales to bounce back and are more willing to raise wages.