China's producer prices fell at their slowest rate in nearly two years in July, the government said Tuesday, a sign of improving conditions in the world's second largest economy.

The producer price index (PPI), which measures the cost of goods at the factory gate, fell 1.7 percent year-on-year last month, the National Bureau of Statistics (NBS) said, as a rebound in some commodity prices reduced downward pressures. 

Protracted declines in the PPI bode ill for industrial prospects and economic growth, as they put off customers -- who seek to delay purchases in anticipation of cheaper deals in future -- starving companies of business and funds.

Chinese PPI has been negative for more than four years but narrowing declines in the last three months have fuelled hopes the country -- a key driver of the world economy -- could be reaching the bottom of a painful slowdown.

The drop was less than the 2.0 percent decline forecast by economists in a Bloomberg News survey, and sharply narrower than the 2.6 percent decline in June.

The improvement in PPI "should benefit the corporate sector’s profitability" researchers with ANZ said in a note.

But it will mainly help state-owned enterprises, which dominate heavy industry, they added, so that the impact on private sector investment will be limited.

Producer price inflation should continue to strengthen and will "turn positive" in the second half of 2016 as commodity prices stabilise, they said.

But they warned that until Beijing’s plans to cut coal and steel capacity have "made significant progress, the PPI should not stay strong".

Producer prices were helped by steady demand and "lower capacity utilisation" in factories,  analysts with CICC Macro noted, adding that "higher PPI indicates continued improvement" in manufacturers' profitability this year.

- Consumer inflation eases -

China's GDP expanded last year at its slowest rate in a quarter of a century as Beijing strives to effect a difficult transition in its growth model away from reliance on exports and fixed-asset investment towards one driven by consumers.

Consumer inflation eased slightly in July, Tuesday's data showed. 

The consumer price index (CPI) -– a main gauge of inflation -- rose 1.8 percent on-year, the NBS said, lower than June's 1.9 percent rise but matching expectations in a Bloomberg survey.

Moderate inflation can be a boon to consumption as it pushes buyers to act before prices go up. Beijing is targeting consumer inflation of around 3 percent this year.

A drop in food price inflation dragged on the figures, Julian Evans-Pritchard of Capital Economics said in a commentary, noting a "continued pick-up in broader price pressures" especially in service sectors including health care and education. 

"The summer holiday fuelled the seasonal increases in prices of some services," said NBS analyst Yu Qiumei in a statement. Air ticket prices and tourism agency charges rose 12.1 percent and 6.5 percent respectively month-on-month.

Evans-Pritchard said that inflation was likely to rise in coming months but not enough to concern policymakers.

Shanghai stocks were slightly higher by the break Tuesday, edging up 0.29 percent.