The Caixin/Markit manufacturing Purchasing Manager's Index for March was 50.1.
Analysts polled by Reuters had expected the Caixin/Markit PMI to come in at 45.5, compared with February's sharpest contraction on record at 40.3.
PMI readings above 50 indicate expansion, while those below that level signal contraction.
Although the survey showed business confidence improved as output resumed gradually, Caixin and IHS Markit noted demand challenges ahead.
"Demand conditions remained fragile, as highlighted by a second monthly fall in total new business," they said in a press release.
"A number of panel members mentioned that firms had delayed or cancelled orders due to the ongoing COVID19 pandemic," they added. "Furthermore, new export work declined solidly during March as nations around the world grapple with containing the spread of the virus."
Martin Rasmussen, China economist at Capital Economics said that the jump in the headline figure only suggests that conditions improved in March over February, but it does not mean that the output has rebounded to levels seen before the outbreak.
"At face value the survey suggests that just over half of firms saw conditions improve last month—implying that activity improved marginally relative to February's dismal showing but still remains very weak," Rasmussen wrote in a note on Wednesday.
"Weak foreign demand and labour market strains will hold back the pace of recovery," he added.
On Tuesday, the official manufacturing PMI for March came in at 52.0, beating expectations for a contraction.
Analysts said the official reading on Tuesday showed an expansion after Chinese economic activity came to a halt in February. The PMI readings are sequential.
The Chinese government has implemented large-scale lockdowns and quarantines of millions of people since late January to contain the outbreak of the coronavirus disease, formally known as COVID-19. This restricted movement and economic activity.
Factories are just starting to come online as daily infection numbers slow. China has said most new infections are now from residents returning from other countries.
China's Ministry of Industry and Information Technology said Monday at a press conference said resumption of work rate for small and medium-sized enterprises nationwide was 76% as of March 28.
The Caixin/Markit survey features a bigger mix of small- and medium-sized firms. In comparison, the official PMI survey typically polls a large proportion of big businesses and state-owned companies.
The difference in the official and Caixin/Markit manufacturing PMI readings for March suggests that smaller enterprises and the private sector in general are suffering more than larger firms and state-owned enterprises, said Rasmussen.
— CNBC's Evelyn Cheng contributed to this report.