China's factory activity shrank more than initially estimated in July, contracting by the most in two years as new orders fell and dashing hopes that the world's second-largest economy may be steadying, a private survey showed on Monday.

The final Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) dropped to 47.8 in July, the lowest reading since November 2011, from June's 49.4.

New orders for China's factories went backwards in July. Credit:Bloomberg

That was worst than a preliminary "flash" reading of 48.2 and marked the fifth straight month of contraction, as indicated by a reading below 50.

New orders reversed into contraction last month after growing in June, while factory output shrank for the third consecutive month to hit a trough of 47.1, a level not seen in more than 3-1/2 years.