Stocks on the Chinese mainland rose to a seven-year high on Thursday as a gauge of factory output showed production contracting for a third straight month, boosting speculation that the government will escalate efforts to stimulate the economy.

China Cosco Holdings Co [Hong Kong Company Registration Guide]and China Shipping Development Co both jumped by the 10 percent daily limit after the two companies said they plan to form a venture in Singapore.

Fiberhome Telecommunication Technologies Co advanced 2.2 percent after the government said it will accelerate construction of a broadband network.

The Shanghai Composite Index climbed 1.9 percent to 4,529.42 points at the close, the highest since February 2008.

The preliminary Purchasing Managers Index from HSBC Holdings Plc and Markit Economics was 49.1 for May, missing analysts' estimates.

"The worse the data, the more speculation that more monetary stimulus will be coming," said Wei Wei, an analyst at the West China Securities Co in Shanghai. "The market has a consensus that the economy won't pick up any time soon so the impact of the economic data isn't too big."

The CSI 300 Index rose 1.8 percent. Hong Kong's Hang Seng China Enterprises Index fell0.7percent, while the Hang Seng Index lost 0.2 percent. The Bloomberg China-US Equity Index, the measure of the most-traded United States-listed Chinese companies, added0.2percent inNew York on Wednesday.

Trading volumes in the Shanghai Composite were 17 percent lower than the 30-day average. The index has surged 124 percent in the past 12 months amid speculation the government will extend interest-rate cuts and accelerate reforms of State-owned enterprises to bolster growth.

The measure is valued at 17.3 times the projected 12-month earnings, compared with the five-year average multiple of 10.2, according to data compiled by Bloomberg.

The preliminary manufacturing index, known as the flash PMI, missed the median estimate of 49.3 in a Bloomberg survey. Numbers below 50 indicate contraction. Manufacturing output slipped to a 13-month low, the PMI report showed, while employment continued to shrink.

The government has escalated efforts to prevent a hard landing in the world's second-biggest economy, adding fiscal loosening to monetary easing. In the latest moves, it relaxed financing rules for local governments in a bid to boost demand for credit, while three interest-rate cuts since November aim to lower borrowing costs.

"The policy easing hasn't shown an effect yet," said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong, adding that he expected the economy to stabilize in the third quarter. "Credit supply has been sufficient, but demand has remained weak."

The CSI 300 consumer-staples index climbed 3.6 percent to an all-time high.

China's mutual funds have "just" started to become net buyers of stocks, the China Securities Journal reported, [Hong Kong Company Formation & Registration] citing people from multiple larger fund firms.

Some funds started to have more buyers than sellers "just a while ago" after facing pressure from selling orders during the bull market, according to the report.