The private Caixin/Markit manufacturing purchasing managers' index (PMI) dropped to 47.8 in July from 49.4 in the previous month.
It is worse than a preliminary reading of 48.2 and is the fifth consecutive month of contraction in the sector.
A figure below 50 shows contraction in the sector and one above means growth.
The reading was the lowest since July 2013, when it fell to 47.7.
The disappointing results, which focus on small to mid-sized companies, come after the official survey over the weekend also showed signs of a slowing Chinese economy.
The official PMI, which focuses on larger companies, fell to 50 in July from 50.2 in June as growth stalled unexpectedly.
Bernard Aw, market strategist at trading firm IG said the data was not surprising and reinforced the view that there will be further weakness in the economy.
"I feel that the macro outlook of China - which is probably slowing further - has already been considered by the market," he said in a note on Monday.
The deterioration in China's vast manufacturing industry comes despite the government recently intervening heavily to boost the economy and stock market.
The central bank has already cut interest rates four times since November. It has also continuously eased lending rules for banks in aggressive measures to spur spending.
But manufacturers continued to cut production levels, with July seeing the fastest rate of contraction since November 2011.
Factory production - which contributes to the overall manufacturing activity reading- was at 47.1 in July, shrinking for the third month in a row.

Firefighters across the UK who retired between 2001 and 2006 received lower lump sums than they should have because of an error by the UK government.
The Treasury has given the Welsh government £5m to compensate those affected in Wales.
It follows a ruling by the Pensions Ombudsman in a test case in May.
Retired Strathclyde fireman William Milne received more than £30,000 after winning his claim against the UK Government Actuary's Department (GAD).
The Ombudsman ruled that firefighters and police officers who retired between December 2001 and November 2006 should receive a top-up to their lump sum, plus interest.
Thousands of police officers - including hundreds in Wales - are also affected.
As the fire service is devolved, the Welsh government is overseeing the compensation payments to retired Welsh firefighters.
The UK government is responsible for payments to retired police officers in England and Wales.
A Welsh government spokeswoman said: "The Treasury has provided the necessary funding so that we are not required to absorb the costs from our existing budgets.
"The Welsh government will provide grant payments totalling £5.24m to the three Welsh Fire and Rescue Authorities to cover payments owed to firefighters who retired between 2001 and 2006."
Factory activity in the world's second largest economy, China, shrank the most in two years in July as new orders fell more than expected.
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About 400 retired firefighters in Wales are to receive thousands of pounds in compensation because their pensions were miscalculated.