As the story goes, in the beginning, Pan Gu (盘古 pán gǔ) was born in the Primordial Universe where he laid for 18,000 years before waking up surrounded by nothing but absolute chaos. As he felt around blindly his hand found an axe and with one giant swing he separated yin and yang (阴阳 yīn yáng) and the chaos gave way to order, with yin floating up and creating the Heavens (天 tiān), and yang falling down to create the Earth (地 dì).
This story was first recorded in the book "Three Five Historic Records"1 (三五历纪 sān wǔ lì jì) which is thought to have been written between 220–265 ADE, though the fable itself is believed to predate the book by thousands of years.
1 "Three Five" refers to the "Three August Ones and Five Emperors" (三皇五帝 sān huáng wǔ dì) or the "Three Sovereigns and Five Emperors." These were two groups of mythological rulers or deities in ancient China. The Three Sovereigns lived and ruled before the Five Emperors, each of whom have been assigned dates over an 800 year period from circa 2852 BCE to 2070 BCE.
In the story "Pan Gu Separates the Sky/Heavens from the Earth" (盘古开天辟地 pán gǔ kāi tiān pì dì), the axe is referred to as the 开天斧 which literally translates to "Open Sky/Heavens Axe." Perhaps a better - but longer winded - translation would be something along the lines of "the Axe that Opened up the Heavens." But the nature of the story begs the question, "where did the axe come from?" To which there are a few schools of thought: