China’s Factories Show Surprising Growth

China's small and medium-sized factories showed encouraging signs of expansion last month. This unexpected growth has reduced market concerns about potential economic stagnation in the world's second largest economy. Although Beijing's economy is recovering from the impact of the COVID-19 pandemic, there is still work to be done to ensure sustained growth.

The positive news had a ripple effect across Asian markets, resulting in mostly favorable gains on Thursday. Hong Kong's Hang Seng (HSI) Index bounced back by 0.9% after experiencing a 2.4% decline the previous day due to weak official Caixin Manufacturing Purchasing Managers' Index (PMI) data. This recovery prevented the index from entering bear-market territory. 

Japan's Nikkei 225 (N225) rose by 0.6%, and China's Shanghai Composite Index gained 0.5%, partially offsetting their losses from Wednesday. However, South Korea's Kospi experienced a slight decline of 0.4%.

The PMI saw an improvement, rising to 50.9 in May from April's 49.5. This positive shift marks the first expansion recorded by the index since February, indicating a return to growth territory. A PMI reading above 50 indicates expansion, while a reading below 50 indicates contraction. The Caixin survey primarily focuses on small and medium-sized enterprises.

Although the unexpectedly robust data has alleviated concerns about Chinese economic growth, investors are expected to remain cautious due to the dissipating growth momentum and heightened geopolitical tensions. As a result, the theme of reducing investment exposure to China may still persist among investors.