The HSBC Flash PMI for July, the earliest available indicator of China's industrial sector, which is slanted more toward private and export-oriented firms, rebounded to 49.5 from June's final reading of 48.2.
Although still under the 50 mark which separates expansion from contraction, the data indicated a fast pace of recovery, said Qu Hongbin, chief economist for China at HSBC.
"July's flash PMI data picked up to a five-month high, suggesting the earlier easing measures are starting to work," Qu said.
The component indices showed industrial output has grown above 50. New orders, new export orders and employment, although remaining below 50, reported a smaller contraction compared with that in June.
"Overall, the July flash PMI reading suggests that economic activities will likely begin to gradually improve in the coming months as the impact of policy easing begins to carry through," JPMorgan China said in a statement.
However, given the still weak demand and employment implied by the below-50 data, HSBC's Qu said more easing efforts are needed to support growth and jobs.
"We believe fast falling inflation allows China to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through," Qu added.
China's gross domestic product grew 7.6 percent from a year earlier in the second quarter, the slowest pace in three years and drawing closer to the go-vernment's minimum target of 7.5 percent for this year.
Meanwhile, the Consumer Price Index, the main gauge of inflation, rose 2.2 percent year on year in June, a 29-month low that allowed more room for policy easing.
Zhang Zhiwei, an economist at Nomura, said that recent signs indicated a prolonged downturn which would make the government feel a greater urgency to loosen policy and that public investment would likely pick up in the coming months.
Earlier this month, China cut interest rates for the second time in a month to lower borrowing costs for business and investment. Before that, China had reduced reserve requirements.