China's factory activity contracted in August after a two-month expansion due to the sporadic outbreaks of the COVID-19 pandemic and the heat-induced power rationing, a survey showed on Thursday.

The Caixin China Manufacturing Purchasing Managers' Index (PMI) narrowed to 49.5 in August, down 0.9 percentage points from July, echoing the official PMI gauge at 49.4 released on Wednesday. The 50-point mark on the index separates growth from contraction.

"Right now, the economy is still slowly recovering from a widespread outbreak of COVID-19 in the first half of the year. Yet, local flare-ups and the punishing heat wave have disrupted the trend and created new downward pressures, posing a threat to the recovery," wrote Wang Zhe, senior economist at Caixin Insight Group, commenting on the data.

China resorted to power rationing in southwest China's Sichuan Province last month in the face of a record heat wave coupled with the lowest level of rainfall in history. The situation has since eased and electricity power for general industrial and commercial activities in the province was fully restored on August 28.

Supply remained stronger than demand, with the sub-index for total new orders in the survey falling into contraction on subdued market demand. The new export business sub-index also edged down for the same reason.

The demand conditions led firms to cut back slightly on their purchasing activity and inventory levels, the survey showed.

On a positive note, the prices for some raw materials, led by metals and chemicals, recorded their first fall since May 2020, easing operating expenses for manufacturers.

China is due to unveil more detailed policies in early September to boost demand and stabilize the foundation of economic recovery, according to a State Council executive meeting chaired by Premier Li Keqiang on Wednesday.

China's central bank cut three key lending rates in August to lower financing costs and stabilize economic growth.

The People's Bank of China cut the one-year loan prime rate by 5 basis points to 3.65 percent and the five-year rate for mortgage lenders by 15 basis points (bps) to 4.3 percent. It also lowered the rate on 400 billion yuan ($59.33 billion) of one-year medium-term lending facility loans to some financial institutions by 10 bps to 2.75 percent.

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