Business activity in China rose more than expected in January, government data showed on Tuesday, as the recent easing of COVID-19 measures and Lunar New Year celebrations helped overcome a 3-month slump.

China’s manufacturing business activity index (PMI) rose to 50.1 in January, higher than the expected 49.8 and December’s 47.0. A reading below 50 indicates contraction.

The country’s massive services sector also rebounded sharply after a 3-month slump. The non-manufacturing PMI rose to a 6-month high of 54.4, above expectations of 52.0 and well above December’s 41.6.

This helped China’s composite PMI climb from 42.6 in December to 52.9 in January, and the index is now back in growth territory.

The better-than-expected data suggests that the world’s second largest economy is clearly on the road to recovery from last year’s COVID-19-induced lull, especially after it clearly signaled a shift away from its strict zero-tolerance COVID-19 policy in early January. The latest economic growth data also showed that China’s fourth quarter GDP growth was stronger than expected.

The country has relaxed most measures to combat the coronavirus and reopened its borders after 3 years of periodic quarantine measures brought economic activity to a halt.

The week-long Lunar New Year holiday also contributed to positive January figures as it was the first lunar holiday in 3 years without any COVID-19 restrictions. According to state media reports, economic spending on domestic travel and retail purchases rose sharply during the week.

The government also recently confirmed that it plans to support local economic growth with additional spending measures.

However, the country will still face some obstacles in the near term that raise doubts about the timing of economic recovery. The number of COVID-19 cases is rising close to a record high, potentially disrupting business activity.

Analysts have also warned that global economic factors, including a potential U.S. recession and increased trade restrictions on Chinese companies, could hamper a potential recovery this year.

Nevertheless, the prospect of a possible Chinese economic recovery in 2023 has helped boost capital inflows into local markets in recent months.