With numbers below 50 indicating a contraction, the HSBC Manufacturing Purchasing Managers Index rose from November to December, climbing from 47.7 to 48.7, but still remaining below the break-even point, Markit said.
The index in the fourth quarter averaged its lowest reading since the first quarter of 2009, Markit reported.
The report blamed slack "external demand," which is to say, fewer new orders from the United States and Europe.
New export business declined in December after two months of growth, the report said.
"Anecdotal evidence indicated that muted demand conditions had contributed to the decline in overall new business, which was the second in as many months," the report said.
Hongbin Qu, HSBC chief economist, said, "While the pace of slowdown is stabilizing somewhat, weakening external demand is starting to bite."
Qu called for "more aggressive action on both fiscal and monetary fronts to stabilize growth and jobs, especially with prices easing rapidly."