China's manufacturing sector continued to expand moderately in May as new export orders improved, two surveys showed on Monday, adding to tentative signs that the world's third-largest economy is stabilizing.

Weak external demand is still hurting China's manufacturers, but conditions are gradually improving in response to stimulus spending... China remains on track for a moderate recovery after the sharp slowdown seen late last year, said Brian Jackson, an analyst with Royal Bank of Canada in Hong Kong.

The official purchasing managers' index (PMI) fell slightly to 53.1 from 53.5 in April, its third straight month above the mark of 50 that separates expansion from contraction.

A separate PMI published by Hong Kong-based brokerage CLSA rose to a 10-month high of 51.2 from 50.1 in April, its second month above 50.

Asian stocks and the Australian dollar shot to eight-month highs after the release of the data, fueling optimism that the worst of the global downturn may be over.

Both surveys showed a slight improvement in new export orders. The new export orders sub-index in the official PMI breached 50 for the first time since June 2008, rising to 50.1, while the equivalent index in the CLSA PMI reached 49.2, the sixth straight month of improvement.

The official survey, conducted by the China Federation of Logistics and Purchasing (CFLP), canvasses a bigger sample of mainly state-owned firms, while the CLSA survey covers more smaller, privately owned firms, although it is regarded as a better leading indicator particularly for the export sector.

(For a graphic, click on: http://graphics.thomsonreuters.com/069/CN_PMI0609.jpg)

The surveys also showed that the Chinese manufacturing sector is faring much better than in the West, where a number of similar indicators due later on Monday are expected to show further deep contractions in Western economies which are major consumers of Asian goods.

Russia's manufacturing sector contracted at its slowest pace in seven months in May, a further sign that the worst of the slowdown may have passed for major emerging economies.

South Korea's daily export value in May rose for the fourth straight month, a further sign of improvement in the global economy, though economists said it did not mean a lasting recovery had arrived.

Chinese and Hong Kong stocks rose in tandem on the better-than-expected PMI data. The Hang Seng Index <.HSI> was up 2.8 percent, its highest level since September 2008, while the Shanghai Composite Index <.SSEC> was up 3.2 percent in mid-afternoon trade.

NOT GETTING WORSE

The Chinese economy is recovering, and the May PMIs have further proven that this argument is correct, said Feng Yuming, an analyst with Orient Securities in Shanghai.

But Feng said the export sector remained weak despite the slight improvement in the export orders sub-indexes.

We can only say the situation is not getting worse, he said.

Chinese appliance and top TV maker TCL Corp <000100.SZ> said on Monday it expects its sales to grow by at least 7 percent this year to more than 40 billion yuan ($5.9 billion) as it targets the country's increasingly rich consumers.

The government's policy of encouraging home appliance purchases in rural areas is helping domestic sales, but overseas demand continues to sputter, TCL vice president He Cheng Ming told Reuters while in Taiwan for a PC trade fair.

The CLSA survey showed few signals of weakness and signaled that the industrial sector is on track for a sustainable recovery, said Andy Rothman, an economist with CLSA in Shanghai.

Rothman noted that the overall new orders sub-index rose strongly for the second straight month in May, to 53.4 from 50.9, driven mainly by healthy domestic demand.

Companies also continued to draw down their inventories of finished goods, suggesting that output growth could be maintained in the months ahead.

But we want to repeat one point we made last month: it is unrealistic to expect the recovery to continue on an uninterrupted path upwards, he said in a note to clients.

Anticipate some volatility in the coming couple of quarters, but dips in the data should be seen as buying opportunities.

(Reporting by Jason Subler and Zhou Xin; Editing by Ken Wills)

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