China's manufacturing activity improved in May but the world's second-largest economy faces headwinds, particularly in the property sector, HSBC said Tuesday.
The HSBC final purchasing managers' index (PMI), which tracks activity in the nation's factories and workshops, came in at 49.4 in May, lower than a preliminary reading of 49.7, the British-based banking giant said in a statement.
But the figure improved from 48.1 in April and was the highest reading since January's 49.5, the bank's data showed.
The index is a closely watched indicator of the health of the economy. A reading above 50 indicates expansion.
The May result marked the fifth consecutive month that the manufacturing industry contracted, according to the survey.
"The final PMI reading for May confirmed that the economy is stabilising, but it is too early to say that it has bottomed out, particularly in light of a weaker property sector," Qu Hongbin, HSBC's economist in Hong Kong, said in a statement.
Home prices in major Chinese cities posted their first monthly decline in nearly two years in May, according to the China Index Academy, the research unit of real estate website operator Soufun, providing new evidence the once red-hot market is losing steam.
China's property sector is a key driver of economic growth.
"The lack of a sustainable growth momentum warrants stronger policy support," Qu said, adding that he expects the government to relax its monetary and fiscal policy gradually over the coming months.
China on Friday signalled it will further ease monetary policy to support the economy by cutting the amount of funds that some banks must hold in reserve, a sign officials are concerned.
The State Council, China's cabinet, announced that it would trim reserve requirements for banks which lend to the agricultural sector and small enterprises.
China launched a similar, targeted reserve cut for banks in rural areas just over a month ago amid escalating worries the economy is slowing more sharply than expected.
The HSBC report came after the National Bureau of Statistics announced that the official PMI reading rose to 50.8 in May from 50.4 in April, the third straight month of improvement and a five-month high.
Nomura economists in a research note revised their forecast for China's 2014 economic growth to 7.5 percent from 7.4 percent on the pickup in the official and HSBC PMIs and other indicators, as well as the intensifying policy easing measures.
But they warned the expansion may slow down next year due to limited room for further policy loosening and a sluggish property market.
"We do not believe a recovery is sustainable in the medium term and continue to expect growth to slow to 6.8 percent in 2015," they said.