Investors look at computer screens showing stock information at a brokerage in Nanjing, Jiangsu province, July 14, 2017. [Photo/VCG]

Chinese A-shares extended a rally on Tuesday with the Shanghai Composite Index climbing to a three and a half month high.

Investors were cheered by a survey indicting that factory activity accelerated in July and with the release by the listed companies of peppy preliminary half-year profit reports.

The Shanghai Composite Index closed the day with a 0.60 percent gain to 3,292.64 points. Finance and Xiongan-themed shares were among the biggest climbers. New China Life Insurance Co Ltd shares increased by the 10 percent upside limit.

The Shenzhen Component Index rose by 0.19 percent, while the ChiNext startup index climbed by 0.27 percent. The SSE 50, dubbed China's "Nifty Fifty" index, scaled a two-year peak.

China's manufacturing activities expanded at the fastest pace in four months in July, on the back of economic stabilization, according to a survey conducted by Markit and sponsored by Caixin Media Co Ltd on Tuesday.

The Caixin China General Manufacturing Managers' Index stood at 51.1 for July, up from 50.4 in June, above the 50-point mark that separates growth from contraction.

"Good PMI data and good earnings performances by listed companies in the first half have contributed to today's share rise," said Hong Hao, chief strategist at BOCOM International Ltd, adding that large-cap shares and upstream resources stocks performed the best.

According to market intelligence provider Tonghuashun, 108 A-share listed companies are scheduled to release half-year earnings reports this week. Of these, 75 companies have already released preliminary reports and 62 reported profit gains.

For example, Shan Dong Haihua Company Ltd, Shanxi Xishan Coal and Electricity Power Co Ltd, Nuode Investment Co Ltd, China Fangda Group Co Ltd, Suzhou Boamax Technologies Group Co Ltd and Shanghai Xuerong Bio-Technology Co Ltd all reported that their first-half profits would increase more than 200 percent year-on-year respectively.

On July 27, the ChiNext board rose 3.62 percent, its best day in 14 months, raising hopes startups could rebound after their sustained weakness in the past two years.

But investors may be reading too much into the fact that some State-backed funds, dubbed the "national team", had joined the ranks of the 10 biggest shareholders of some ChiNext firms, according to Gao Ting, head of China Strategy at UBS Securities.

"Banking was the only sector in which the national team increased its shareholding," said Gao.

Gao said the focus of the State-backed funds would remain financial.

"We do not expect the team to change (to other sectors) ... and believe it will continue increasing its exposure to banking stocks while decreasing its exposure to non-financials."