Preliminary figures from HSBC’s closely watched purchasing managers’ index (PMI), which gauges nationwide manufacturing activity, hit a five-month high of 49.5 in July, the British banking giant said in a statement.
A PMI reading above 50 indicates expansion, while a reading below 50 points to contraction.
HSBC said the reading, which was higher than the 48.2 that HSBC recorded in June, indicated that government measures to boost economic growth were working.
“That said, the below-50 July reading implied demand still remaining weak and employment under increasing pressure,” Qu Hongbin, a Hong Kong-based economist with HSBC, said in the statement.
“This calls for more easing efforts to support growth and jobs.”
China’s gross domestic product fell to a more than three year low of 7.6 percent in the second quarter, prompting the central bank to take the rare step of slashing interest rates for the second time since early June.
It has also cut the amount of money banks must keep in reserve, aimed at stimulating lending, three times since December.
Chinese leaders have vowed to take further measures, and Premier Wen Jiabao has called stabilising economic growth the government’s top priority.
Qu the economist said falling inflation gave Beijing leeway to introduce more policies to bolster growth, with “meaningful improvement” of the world’s second-largest economy expected in the coming months.
China’s consumer price index, the main measure of inflation, slowed to 2.2 percent in June, its lowest level in 29 months, according to official data.
Zhang Zhiwei, an economist with Nomura International Limited in Hong Kong, said the July PMI reading reinforced signs that the Chinese economy bottomed out in the second quarter and will rebound in the July-September period.
“We continue to expect policy easing to pick up,” he said in a research note.
Chinese shares edged up modestly on Tuesday as investors awaited other economic data due to be released early next month to further confirm the recovery.
The Shanghai Composite Index closed up 5.19 points to 2,146.59 on turnover of 46.7 billion yuan ($7.3 billion).
HSBC will issue the final reading of July PMI on August 1.