An employee counts yuan banknotes at a bank in Huaibei
An employee counts yuan banknotes at a bank in Huaibei, Anhui province . Reuters

China's manufacturing activity rose in July compared to that in June, according to the preliminary HSBC Flash Purchasing Managers Index (PMI) released Tuesday.

The preliminary reading of the PMI, a measure of the nation-wide manufacturing activity, climbed to 49.5 in July, which is a five-month high, compared to 48.2 in June. However, this report could not revive the market confidence.

The rise in the reading would decrease fears of the likelihood of a sharp slowdown in the economy. However, since the reading is below 50, the index continues to remain in the area of contraction.

This calls for more easing efforts to support growth and jobs. We believe the fast falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through, Hongbin Qu, chief economist, China & Co-Head of Asian Economic Research at HSBC, said in a note.

There have been fears of a hard landing after data showed earlier this month that China's economy slowed down to 7.6 percent in the second quarter, down from 8.1 percent in the first quarter. Beijing is targeting a growth rate of 7.5 percent this year. In 2011 and 2010, the economy grew by 9.2 percent and 10.4 percent respectively.

Beijing's goal this year will be to promote a steady and robust economic development, keep prices stable and guard against financial risks by keeping money and credit supplies at appropriate levels while being cautious and flexible. China's investment-driven economic model, though successful for decades, is no longer seen as sustainable with the consensus being that reforms will be needed to prevent a sudden downturn.

The continuing debt crisis in Europe and the tentative U.S. recovery have hurt demand for exports, the key driver of China's economy. The International Monetary Fund (IMF) has warned that escalation of the euro zone debt problems could slash China's 2012 GDP growth in half.

Earlier this month, the People's Bank of China cut interest rates for a second time this year. The one-year benchmark lending rate was reduced by 31 bps, taking it to 6 percent. This easing in the monetary policy is seen as a much-needed thrust to boost liquidity in the financial system and help the economy regain its growth momentum.