Banking giant HSBC said preliminary data from its Purchasing Managers Index (PMI) showed activity in China's factories shrinking at a much slower pace in May than the previous month, improving from 49.7 to 48.1.
The British bank said PMI is a closely watched gauge of the health of the Asian economic powerhouse and is a key driver of global growth.
"The improvement was broad-based with both new orders and new export orders back in expansionary territory," Qu Hongbin, HSBC's Hong-Kong-based economist, said in a statement. Whilst this figure is below the 50-mark, which normally signals a contraction, it is the second straight month of improvement and is a telling sign that the world's number two economy is picking up.
"Some tentative signs of stabilisation are emerging, partly as a result of the recent mini-stimulus measures and lower borrowing costs," he added. The downside risks to growth remain with the property market, which drives expansion in a wide range of industries from steel to home decoration, continuing to cool down.
"We think more policy easing is needed to put a floor under growth in the coming months," Qu said.
In the first three months of 2014, China's economy grew 7.4 percent, weaker than the 7.7 percent in October-December. Premier Li Keqiang in March announced an ambitious growth target of "around 7.5 percent" for this year.
Beijing have announced a series of measures in order to bolster this target growth, including tax breaks for small enterprises, targeted infrastructure outlays and incentives to encourage lending in rural areas.