But the figures released by the British banking giant showed the cost of raw materials rose at a faster rate this month, complicating Beijing's efforts to rein in inflation in the world's second-largest economy.

HSBC's preliminary purchasing managers' index rose to 49.8 in August from 49.3 in July -- which was the lowest level in 28 months and the first contraction in a year -- according to a statement.

A reading above 50 indicates the sector is expanding, while a reading below 50 suggests contraction.

The August reading is subject to revision when the bank publishes its final figures on September 1.

New export orders continued to contract in August although the sub-index reached the highest level in three months, HSBC said, amid deepening economic woes in the United States and Europe -- key buyers of Chinese-made products.

HSBC chief economist Qu Hongbin said the improvement in manufacturing activity this month showed that "the hard landing risk is still remote".

"This provides leeway for the PBOC (central bank) to keep the current tightening measures in place," Qu said.

Copyright AFP (Agence France-Presse), 2011