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China PMI could mark end of negative data surprises

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The positive surprise in China's official reading on the manufacturing sector Thursday is a result of improving business sentiment on the back of Beijing's recent stimulus announcement, analysts told CNBC.

The government's Purchasing Managers' Index (PMI), which rose to 50.3 in July from 50.1 in June and beating market expectations of 49.9 according to a Reuters poll, also marks the first sign of stabilization in the world's second largest economy, they added.

The key 50 threshold demarcates expansion from contraction.

(Read more: More bad news for China? Factory profit growth eases)

"Since mid-July Premier Li has made it very clear that his government will try to achieve the 7.5 percent growth target with some policy easing measures including more investment in infrastructure fixed asset investment," Ting Lu, head of Greater China economics at Bank of America Merrill Lynch wrote in a note.

"So the official PMI survey which was conducted late July could be impacted by the more positive sentiment," he said.

Last week, the government unveiled initiatives to support growth including cutting taxes for some small and micro-sized enterprises and measures to stabilize exports and speed up railway investment.

According to Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole, this could be the end of negative surprises in the country's economic data.

"This may mark the beginning of a turnaround in sentiment on China," he said.

(Read more: China offers further pro-growth policy fine-tuning)

The changing sentiment could explain how investors shrugged off a separate private reading of the manufacturing activity, which was also out on Thursday, which showed a different picture of China's economy.

The HSBC final China PMI fell to an 11-month low of 47.7 in July from 48.2 in June, in line with the flash estimate released last week.

But investors chose to focus on the official figure, pushing the Shanghai Composite up 1.1 percent, and the Hong Kong's Hang Seng up 0.6 percent.

(Read more: China fires growth salvo, is monetary easing next?)

According to Lu of Bank of America Merrill Lynch, as the economy shifts away from its dependence on exports, more attention should be paid to the official PMI.

"In our view, at this moment we should surely focus on the official PMI simply instead of the HSBC PMI because exports now only contribute 10 percent of China's GDP," Lu said.

—By CNBC's Ansuya Harjani; Follow her on Twitter: @Ansuya_h

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