China’s small and medium-sized factories post surprise growth, easing market anxiety

     A key gauge of China’s small- and medium-sized factories showed their surprise return to expansion last month, which eased market anxiety about growth stalling in the world’s second largest economy.

Asian markets mostly rose Thursday following the release of the data, with sentiment also boosted by abating US debt default risks after the House of Representatives passed a bill to suspend the nation’s debt limit.

The Caixin manufacturing Purchasing Managers’ Index (PMI) rose to 50.9 in May from April’s 49.5, according to a private survey. This is the first improvement of the index since February and signals its return to expansion territory.

A PMI reading above 50 indicates expansion, while anything below that level shows contraction. The Caixin survey is focused on small and medium-sized enterprises.

The Caixin data contrasts sharply with a deepening decline in activity shown in a government survey, which mainly covers larger businesses and state-owned companies, released on Wednesday.

The official manufacturing PMI dropped to 48.8 in May from April’s 49.2, the lowest level since December, when China ended most of its pandemic measures, according to the National Bureau of Statistics. It was the second contraction in as many months.

The surprisingly robust data has alleviated some concern about Chinese growth, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Nevertheless, the theme of reducing investment exposure to China may remain given the economy’s dissipating growth momentum and elevated geopolitical tensions, he added.

Asian markets received a boost from the Caixin data.

Hong Kong’s Hang Seng  Index rebounded 0.9%, following a 2.4% decline on Wednesday, which was triggered by the weak official PMI data. Thursday’s gains helped the index avoid bear-market territory.

Japan’s Nikkei 225   rose 0.6% and China’s Shanghai Composite Index gained 0.5%, both recouping some of Wednesday’s losses. South Korea’s Kospi, however, was down 0.4%.

Sentiment was also lifted by the US House of Representatives approving a deal to raise the country’s debt limit. The legislation will now need to be passed by the Senate before it can be sent to President Joe Biden to be signed into law.

The Chinese currency also recovered some losses against the US dollar. The offshore yuan strengthened 0.1% to trade at 7.11 per dollar. The onshore rate also firmed, up 0.2% versus the greenback.

US oil futures rose on Thursday. WTI, the US benchmark, gained 0.5% to trade at $68.43 per barrel. It settled 2% lower on Wednesday, weighed down by the weak China data and a stronger greenback.