A private gauge of China's manufacturing sector has shown that factory activity in the world's second largest economy expanded for the first time since February 2015 in July.

The manufacturing purchasing managers' index (PMI), compiled by Caixin and Markit, rose to 50.6 from 48.6 in June, comfortably beating analyst expectations for a reading of 48.9.

A score above 50 indicates expansion in the sector.

The output, new orders and inventory sub-indices all came in above 50, but employment continued to decline at a solid pace as manufacturers sought to cut costs.

"This indicates that the Chinese economy has begun to show signs of stabilizing due to the gradual implementation of proactive fiscal policy," said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group.

"But the pressure on economic growth remains, and supportive fiscal and monetary policies must be continued."

Meanwhile, the Chinese government's official manufacturing PMI, which is more skewed towards larger enterprises, fell to 49.9 in July from 50.0 in the previous month, missing expectations for a score of 50.0.

Stimulus measures

China's economy expanded 6.7% from a year earlier in the April to June period, as the government's massive stimulus programme helped raise demand in the industrial sector.

The government has set a growth target of 6.5% to 7% for the economy in 2016.

Mercedes-Benz factory, Beijing
Chinese factory activity recorded modest growth in July Reuters

Other official figures released for June also suggested that the Chinese economy was stabilising, with both industrial production and retail sales beating expectations.

Factory output was up 6.2% from a year ago while retail sales jumped 10.6%, accelerating from a 10% increase in May.

Meanwhile, fixed-asset investment expanded 9% in the first six months of the year, compared to 9.6% growth in the January to May period.

The Chinese government front-loaded its stimulus programme in the first quarter to boost a sluggish economy, with banks lending billions of dollars to businesses to maintain cash flow.

The world's second largest economy grew 6.9% last year — its weakest expansion in a quarter century — falling short of Beijing's target of 7%.