EMERGING MARKETS-Stocks, FX muted as upbeat China data fails to impress

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China stocks edge higher, yuan declines

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China's factory activity grows in May - survey

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Turkey's lira steadies from record lows

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South African rand hits record low

By Siddarth S and Amruta Khandekar

June 1 (Reuters) - Emerging markets currencies and stocks were muted on Thursday as a surprisingly upbeat Chinese factory activity report failed to dispel investor concerns about the country's slow economic recovery, while the South African rand hit an all-time low.

MSCI's emerging market equities index held near the unchanged mark at 0845 GMT, after hitting a two-month low on Wednesday, with stocks in mainland China up 0.2%.

A private sector survey showed China's factory activity unexpectedly swung to growth in May from a decline in April, driven by improved production and demand.

China's yuan initially strengthened against the dollar but later gave up the gains, falling 0.1% and extending declines to the fourth straight session.

The latest data is in contrast to a slew of recent readings, including one on Wednesday showing a faster-than-expected deterioration in manufacturing activity, that have underscored a weak post-pandemic recovery in the world's second-largest economy.

"One set of better-than-expected Chinese data is unlikely to significantly improve market sentiment following plenty of indication that the economy is not performing as well as investors were hoping for after the COVID restrictions were eased," said Piotr Matys, senior FX analyst, In Touch Capital Markets.

The dollar held strong despite some U.S. Federal Reserve policymakers pointing towards a rate hike "skip" in June and the passing of the U.S. debt ceiling bill in the House of Representatives.

"At this stage of the monetary policy cycle, it's far more important when the Fed may start cutting interest rather than when it may stop raising them. The message remains relatively clear from Fed's officials: the markets are expecting us to start cutting rates way too early," said Matys.

The broader EM currencies index was also muted.

South Africa's rand fell as low as 19.9075 against the U.S. dollar, worse than the previous record low of 19.8600, due to a worsening power crisis and geopolitical tensions.

Turkey's lira steadied marginally after briefly dropping to a record low of 22.95 against the dollar overnight.

Former economy chief Mehmet Simsek was almost certain to be appointed to newly re-elected President Tayyip Erdogan's new cabinet, according to sources.

Also, Turkish factory activity expanded further in May, a survey showed.

Central and eastern European currencies were mixed, with the Hungarian forint flat against the euro, while the Polish zloty fell 0.1%.

Poland's manufacturing sector shrank further in May but at a shallower pace, a survey showed.

Sri Lankan shares rose after the country's central bank cut key interest rates by 250 basis points on easing inflation.

For GRAPHIC on emerging market FX performance in 2023, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2023, see https://tmsnrt.rs/2OusNdX

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For RUSSIAN market report, see (Reporting by Siddarth S in Bengaluru; Editing by Rashmi Aich)