China's factory activity continued a second month of growth – although at a slower pace – that pointed to further improvement in the overall health of China's manufacturing sector, following recent COVID-19 flare-ups, a private survey showed on Monday.

China's July Caixin manufacturing Purchasing Managers' Index (PMI) narrowed to 50.4 from 51.7 in June, with sub-indexes for output and new orders showing softer increases.

The survey, compiled by S&P Global, showed that muted customer demand, lingering COVID-19 impacts and power supply disruptions have weighed on the manufacturing sector's growth.

The Caixin readings followed the official PMI gauge release on Sunday which showed a surprise contraction at 49 after a rapid recovery in June. The 50-point mark on the index separates growth from contraction.

The survey found a marked slowdown in cost inflations for manufacturing enterprises, thanks to a decline in some bulk commodity prices. It also found that manufacturers remained optimistic, while at the same time were worried about the risks of future COVID-19 outbreaks and a drop in demand.

The survey pointed out that employment remained weak as companies cut costs and sales declined. 

"The gauge for employment, which has been in contractionary territory for 11 of the past 12 months, came in at the lowest reading since April 2020," wrote Wang Zhe, senior economist at Caixin Insight Group, commenting on the data.

Wang called for more measures to focus on stabilizing the job market, subsidy issuance and offering temporary relief.

China's gross domestic product grew 0.4 percent year-on-year in the second quarter of 2022, while headline data showed the recovery had gathered momentum in June.

Wang said that the adverse economic impact of the latest round of pandemic has waned in the second quarter, while the third quarter will be a crucial period to get the economy back on track.

"As the authorities have made it clear that no ultra-massive stimulative measures would be forthcoming, effective implementation of existing policies is a more practical option," he added.