HONG KONG -- China's August economic data indicated the world's second-largest economy has been stabilizing and that the government still has room for bolstering growth.

China's consumer price index, a main gauge of inflation, moderated to 2.6 percent year-on-year in August from 2.7 percent in July, while the producer price index, which measures inflation at the wholesale level, dropped 1.6 percent year-on-year last month, compared with a 2.3 percent fall in July.

Merrill Lynch, one of the world's leading financial management and advisory companies, held that the two inflation readings should be positive for the markets.

"The low CPI means that the government still has room for bolstering growth via implementing a mini fiscal stimulus and avoiding monetary tightening, and the rising PPI suggests that the economy has been recovering," according to a Merrill Lynch report released Tuesday.

Lu Ting, China economist at Merrill Lynch, said though CPI will likely exceed 3 percent in the remainder of this year, the chance to exceed 3.5 percent is small.

HSBC's Chief Economic for China Qu Hongbin, echoed Lu's view. " Given that overall inflation pressure will remain modest in the coming months, policymakers in Beijing could continue to focus on measures to support growth and employment."

Apart from the subdued inflation, the country also reported better-than-expected exports in August, which added to signs of a brighter economic outlook.

Last month, export growth quickened to 7.2 percent year-on-year from 5.1 percent in July, and import growth softened to 7 percent from 10.9 percent, with trade surplus widened to $28.6 billion from $17.8 billion in July.

Analysts said the faster export growth and stronger trade surplus were particularly valuable when some other emerging economies are in turmoil partly due to their deteriorating current accounts.

"Exports data suggest an improvement in external demand, while relatively weak imports data imply that domestic demand remains modest. We expect to see more upside surprises in growth data as recent policy stimulus filters through the economy," HSBC's Qu said.

Together with the official purchasing managers' index rising to 51 in August from 50.3 in July, August trade data are supportive of a better economic outlook.

Merrill Lynch said it's confident to maintain the 7.6 percent and 7.5 percent year-on-year growth forecasts for the third quarter and the fourth, respectively.

However, Peng Wensheng, analyst at the China International Capital Corp., warned that China's exports may not continue to experience sharp rebound over the rest of the year because of higher comparison base one year earlier, a stronger U.S. dollar, and the adverse implications of U.S. quantitative easing withdrawal.

Peng said he expects exports to grow 5 percent to ten percent in next few months.