The producer price index (PPI) -- an important barometer of the industrial sector that measures the cost of goods at the factory gate -- dropped 0.3 percent year-on-year in July, down from zero percent in June, according to the National Bureau of Statistics (NBS).

A slowdown in factory gate inflation reflects sluggish demand, while a turn to deflation could dent corporate profits and drag on the world's number two economy, which in turn could lead to a drop in prices globally.

The reading marks the first deflation since August 2016, and fell short of the -0.1 percent forecast in a Bloomberg News survey.

The petroleum and natural gas mining sector led the drop, while a contraction in petroleum, coal and other fuel processing also widened, NBS official Dong Yaxiu said in a statement.

"The profitability for industrial firms will take a hit and the broader outlook will continue to slump," said Edward Moya, analyst at OANDA.

Additional monetary loosening is expected as the central People's Bank of China will put more weight on tackling factory-gate deflation, Julian Evans-Pritchard of Capital Economics wrote in a research note.

China's consumer price index (CPI) -- a gauge of retail inflation -- rose 2.8 percent, up from 2.7 percent in May, marking the fastest pace since February 2018.

Pork prices rose as supply was "slightly shortened" by the African swine fever epidemic while hot summer weather has led to decreased production in eggs, thus driving prices higher, according to Dong.

Chinese and US negotiators met in Shanghai in July in a bid to patch up the trade rift hurting the world's top two economies.

But tensions have mounted rapidly since then, as US President Donald Trump vowed to impose fresh tariffs on $300 billion in Chinese goods from September 1.