China data blitz points to stabilizing economy

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A flurry of data out of China on Friday broadly painted an upbeat picture of the world's second largest economy, which appears to be stabilizing after two years of slowing growth.

Government figures showed industrial output jumping 9.7 percent in July from the year ago period, beating a market forecast by Reuters for a 9 percent again, and higher than the 8.9 percent rise in June.

Retail sales rose an annual 13.2 percent in the month, slightly lower than market expectations for a 13.5 percent rise and after a 13.3 percent gain in June.

(Read more: China risks following Japan into economic coma)

Earlier in the day, inflation figures showed consumer prices accelerated in July, but producer prices dipped in the month, showing the manufacturing sector remains entrenched in deflation for a 17th straight month.

China's consumer price index (CPI) rose 2.7 percent in July from a year earlier, unchanged from June, but the producer price index (PPI) fell 2.3 percent in the month from the year before, slightly worse than the 2.2 percent drop markets were expecting.

"The key point is the deflation in the PPI, which speaks to the capacity in industry and that, in turn, reflects one of the structural vulnerabilities in the economy," said Andrew Colquhoun, senior director and head of Asia-Pacific sovereign ratings at Fitch Ratings on CNBC Asia's "The Call."

"We think weakness is over-investment in the past is driving this deflation in the PPI," he added.

Asian markets chose to focus on the solid industrial output numbers. Stocks across the region pared losses with the Shanghai Composite moving off a one-week low at the 2,030 mark.

(Read more: China market bounce: trend change or false alarm?)

Friday's data followed the blowout trade figures on Thursday. Exports in July rose 5.1 percent from a year earlier compared to a 3.1 percent fall in June. Imports, meanwhile, jumped 10.9 percent in July year on year, versus a drop of 0.7 percent in the previous month.

China debate

The huge improvement in the trade picture has generated a debate over the reliability of the data and the true state of China's economy.

"I'm a very big China data skeptic. There is a lot of volatility in that data," Andrew Su, CEO at brokerage Compass Global Markets said.

"We don't tend to look at the Chinese data. We try to look at the import data coming in from all the other countries that deal with China. There's always been a mismatch with that data and it tends to reflect the unreliability of Chinese data."

(Read more: Missing Figuresin China Data Puzzle Analysts)

According to Su, China's economy has been operating at overcapacity in recent years, shown in the prevalence of so-called "ghost cities."

"Credit growth has doubled the GDP growth, which means there has been a lot of investment in assets that have been underperforming and we've got a lot of infrastructure projects that aren't being utilized," said Su, who expects China to grow 7 percent this year far short of Beijing's target of 7.5 percent.

(Read more: China tourism set for a boom like Japan in the 80s)

But Dennis Gartman, founder of the Gartman Letter, says there is credence to the data and proves that the economy is still chugging along.

"China, I'm afraid is not slowing down as much as everybody wants to have us believe that china's slowing down. I understand that brilliant people are out there telling me that China's slowing. I haven't seen data that shows me that's true," Gartman said.

- By's Li Anne Wong; follow her on Twitter: @LiAnneCNBC