Global Dairy Trade prices lifted 2.4 per cent on Tuesday, reversing a trend since the start of October.
The rise surprised the market, which had forecast a flat result, and appears to be in response to a slight loosening of COVID-19 restrictions in China.
But Chinese demand is still weak - and there is no certainty about future demand with the Chinese President Xi Jinping this week reaffirming the country's commitment to its zero-COVID policy.
Whole milk powder and skim milk powder led the price recovery at Tuesday's event, both up 3.1pc.
Anhydrous milk fat also posted an increase (up 2.7pc), while butter (down 0.8pc), cheddar (down 1.3pc) and lactose (down 4.6pc) defied the trend.
ASB economist Nathaniel Keall said despite the surprise bounce in the auction, "demand from China is still missing in action".
"It's hard to see prices making more sustained gains until it returns - that's unlikely barring a surprise COVID policy reversal by Xi Jinping," he said.
Chinese purchases of whole milk powder were about a third lower than last year and significantly lower than at the start of 2021, "when aggressive Chinese demand sent prices skyrocketing".
Mr Keall said while other regions had stepped in to partially fill the gap, the absence of strong Chinese demand was being sorely missed.
Westpac NZ senior economist Nathan Penny said the positive auction result followed a slight easing of some COVID restrictions in China.
China announced on Saturday shortened quarantine periods by two days for close contacts of infected people and for travellers arriving in the country and the scrapping a rule that penalised airlines for the number of COVID cases they brought into the country.
"Chinese dairy demand had been progressively weakening over the year on the back of the soft Chinese economy," Mr Penny said.
"However, the loosening of COVID restrictions this week may signal a more pragmatic approach to COVID being adopted by Chinese officials.
"We had anticipated that this would be the case at some stage, and on that basis, we expect the Chinese economy to grow by 6pc over 2023 from a soft 3.5pc over 2022."
But Mr Keall was not so upbeat.
"The lack of Chinese demand is being driven by a softer domestic picture: a strict anti-COVID regime and slowing economic growth more broadly have meant the outlook for household consumption in China has weakened considerably," he said.
"The latest data suggest that trend is continuing - retail sales fell by 0.5pc year-on-year in October (compared with expectations they would grow 1pc), as did broader economic data (industrial production, asset investment).
"The consensus growth forecast for the Chinese economy next year has slowed all the way from +5.4pc to +4.5pc over the past couple of months (compared with north of 8pc last year)."
Mr Keall said while policymaking in China was opaque and "the tea leaves are difficult to read", the zero-COVID policy looked here to stay for some time.
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Carlene Dowie
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
