(Bloomberg) -- China’s manufacturing surveys this week provided contradictory signals of factory activity in May, suggesting the outlook for the world’s second-largest economy remains uncertain and policymakers may need to do more to spur growth. 

The Caixin purchasing managers index, compiled by S&P Global and released on Thursday, showed factory activity expanded slightly in May — a surprise improvement after official data published a day earlier pointed to a deeper contraction in manufacturing in the month.

The mixed figures add to concerns about China’s economic recovery and suggests more evidence is needed to gauge the growth outlook. A faltering property market remains a big risk for the economy, with data Wednesday showing a slowdown in home sales. Business and consumer confidence have yet to rebound to pre-pandemic levels, and youth unemployment is at a record high.

“We need more time to see whether the improvement would be sustained,” said Hao Zhou, chief economist at Guotai Junan Hong Kong Ltd. Even so, the economy still needs more policy stimulus to boost domestic demand, he said, predicting a possible interest rate cut in June.   

The data helped buoy Chinese stocks after a sharp selloff the day before. The benchmark CSI 300 Index ended 0.2% higher on Thursday. The boost to the currency was short-lived, with the onshore yuan dropping 0.1% against the dollar after gaining as much as 0.3% earlier.

The Caixin PMI — which mainly covers smaller and more export-oriented businesses than the official PMI — rose to 50.9 from 49.5 in April, rebounding above the 50 level that separates contraction from expansion. Economists surveyed by Bloomberg had predicted the index would be unchanged.

The official manufacturing PMI, meanwhile, dropped to 48.8, pointing to a deeper contraction in factory activity in May. Growth in the services and construction sectors also eased, the survey showed, sparking fears of a downward spiral.

Economists said the divergence in the PMIs was likely due to the different sample size, geographic location and types of businesses surveyed. The Caixin report compiled by S&P Global is based on a survey sample of around 650 private and state-owned manufacturers. The official PMI, published by the National Bureau of Statistics, is based on a survey of 3,200 companies.

Analysis by Bloomberg Economics also shows the NBS index has a stronger correlation to industrial production, while the Caixin index is better correlated to exports.

What Bloomberg Economics Says...

Looking ahead, the signs are clear that exports will weaken in the coming months, which would add to downward pressure on manufacturers. China’s exports fell in April from March. PMIs by S&P show that the US and the euro area manufacturing sectors contracted more sharply in May than in April. South Korea’s exports – a barometer of global demand for Asian exports – continued to shrink in May.

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Chang Shu and Eric Zhu

Below the headline figure, the Caixin report showed manufacturers remained gloomy about the outlook. Business confidence regarding the 12-month outlook for production slipped to a seven-month low, the survey showed. Firms also maintained a cautious approach to staff hiring, with employment across the sector falling in May at the quickest rate since February 2020.  

China’s faltering recovery is also weighing on Asia’s factories. Purchasing managers indexes for export powerhouse Taiwan dropped to 44.3 from 47.1 in the previous month, while Vietnam registered the lowest reading since September 2021, according to S&P Global. South Korea’s factory gauge ticked up marginally in May although remained firmly in contraction territory. 

Japan was a rare exception as factory activity reversed a decline for the first time since October 2022. The au Jibun Bank Japan Manufacturing Purchasing Managers’ Index for the country rose to 50.6 from 49.5 in April.

“Lower customer demand across key export markets such as mainland China, Europe and the US continued to act as a drag on the sector’s performance,” according to Annabel Fiddes, economics associate director at S&P Global Market Intelligence, who said the data likely signals a disappointing second-quarter performance.

--With assistance from Karthikeyan Sundaram, Shikhar Balwani, Chester Yung and Wenjin Lv.

(Updates with additional details.)

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