Asian stocks cheer China PMI data; Nikkei leads gains

Asian stocks rallied on Thursday as investors breathed a sigh of relief that Chinese manufacturing activity didn't fall below market expectations in July.

Japan's Nikkei rallied to a one-month peak, the Shanghai Composite hit a one-week high, South Korea's Kospi hit a seven-week high and Australia's S&P ASX 200 pared gains to end flat.

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China, Fed in the spotlight

Investors cheered China's official purchasing manager's index (PMI)figure, which rose above the key 50 threshold that demarcates expansion from contraction. However, a private gauge of factory activity by HSBC fell to an eleven-month low of 47.7 in July, in line with its flash estimate released last week.

"What we had in China is stress in the financial system and that affects smaller companies more than state owned enterprises. Official PMI is more skewed to larger companies and the HSBC figure reflects the smaller companies and that is where you get this divergence," said Frederic Neumann, managing director and co-head of Asian economics research at HSBC.

(Read more: Will China PMI mark the end of negative data surprises?)

Meanwhile, the Federal Reserve gave no hint it may be reducing its bond-buying program any time soon as it concluded a two-day policy meeting on Wednesday. But it did signal concern about higher mortgage rates and flagged the risks of inflation falling too far below its target.

Shanghai rallies 1.7%

Mainland equities rose to a one-week high following the official PMI data release while a second cash injection from the People's Bank of China also lifted sentiment. Financials cheered the news, with mid-sized lenders China Merchants Bank and Everbright Bank higher by over 2 percent each.

Real estate developers led the rally after a private survey showed new home prices rising 7.8 percent in July from a year earlier. Gemdale and Poly Real Estate rose 3.5 perecnt each.

In Hong Kong, the Hang Seng index rose to a two-month high.

(Read more: Are fears over China government debt are overblown?)

Nikkei adds 2.5%

Japan's benchmark index crossed the 14,000 level to hit its highest level in a month as dollar-yen moved off Wednesday's five-week low to rise above the 98-handle.

Consumer electronic stocks were in focus. Toshiba lost 3 percent after announcing late on Wednesday that its quarterly profit missed expectations while Panasonic rose nearly 7 percent after posting an eight-fold rise in April-June net profit.

Sharp rallied 1.7 percent while Sony lost 1.7 percent ahead of reporting results later in the day. The Nikkei daily reported that Sony's board is expected to reject activist investor Daniel Loeb's proposal to spin off its entertainment operations.

(Read more: Betting on a Tokyo win? Stocks you may like to own)

Sydney 0.2% higher

Australia's benchmark index pared gains after trading within eye-shot of a new two-month high following the release of HSBC's dismal China PMI reading. The Australian dollar showed no reaction to the Chinese data and continued to trade below 90 U.S. cents at a three-year low.

Banks led the declines with most of nation's top four lenders skidding over 1 percent on news that the government will introduce a new tax on bank deposits.

Packaging firm Amcor jumped 1.4 percent after announcing that it plans to spin off its glass and beverage can packaging unit. Meanwhile, Transurban added 2.6 percent after announcing a 198 percent jump in full-year net profit.

The index hit a two-month high at 5,098 on Wednesday while ending the month of July as one of Asia's best performing stock markets with a 5.5 percent gain.

(Read more: The stock market that's on 'fire')

Kospi hits highs

South Korean equities tracked Asia-wide gains to hit its highest levels since June 12 but mixed economic data for July weighed on sentiment.

Consumer inflation accelerated to a five-month high while manufacturing activity fell to a ten-month low. Meanwhile, exports grew 2.6 percent from a year earlier.

Shares of STX Corp surged 15 percent on news that creditors of its subsidiary STX Offshore & Shipbuilding have agreed to provide fresh liquidity in a bid to help resolve its cash crunch.

By's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC