China's industrial firms suffered a rare annual drop in profits in the first two months of 2012 mainly in petrochemicals, metals and auto firms, the latest signs of weakness in the economy and reinforcing the case for policy easing.

Profits fell 5.2 per cent so far in 2012, according to the industrial profitability indicator, published by the National Bureau of Statistics (NBS) every month. The last period that China reported nationwide industrial profit fall was in the first eight months of 2009.

"The pressure is building in Beijing to loosen policy further and support domestic demand," Zhiwei Zhang, China economist at Nomura in Hong Kong, said in a note to clients after the data was released.

"We believe the government needs to cut interest rates and push investment projects in coming months."

Most analysts expect the People's Bank of China to continue to cut the requirement ratio (RRR) for commercial lenders - its most preferred policy tool - to crank up bank credit and support the slowing economy, but RRR cuts may not be enough to counter the problem of weakening domestic demand.

The NBS indicator of year-to-date profits covers industrial firms with annual revenue above 20 million yuan and showed a downward trend of industrial profitability in China.

Industrial profits in 2011 jumped 25.4 per cent to 5.45 trillion yuan (€647.5 billion), or 454.5 billion yuan a month in average, but in the first two months of 2012, combined profits of Chinese industrial firms were only 606 billion yuan, or 303 billion yuan a month.

Many listed industrial firms are already forecasting big drops in profit for the first quarter of this year.

Fangyuan Slewing, a machinery maker, and SC Nitrocell, a chemical company, both said on today net profits in the first quarter may slide 90 per cent or more.

BYD, a Chinese carmaker backed by US billionaire Warren Buffett, yesterday warned of a 65-95 per cent drop in first-quarter net profit due to poor results from its solar business, and said 2011 net profit plunged 45 per cent.

Gao Ting, chief China strategist at UBS Securities, said at a briefing today that China's economy will hit a bottom in the first quarter of 2012.

GDP growth is expected to slow to 8.2 or 8.3 per cent in the first quarter, Mr Gao said.

Corporate profits will be weak in the first quarter accordingly, but he said corporate profitability is likely to improve from the second quarter onward.

"Earnings of non-financial (Chinese) listed companies are expected to fall about 10 per cent from a year ago in the first quarter," Mr Gao said.

According to NBS, profits in the chemical industry fell 28.8 per cent, those in ferrous metal processing plunged 94 per cent, while car manufacturing profits were down 6.5 per cent.

Enterprises in the sectors of petrochemical, coking and nuclear fuel processing made losses in the first two months of 2012, compared with a profit in 2011, the agency said.

Energy exploration firms fared better, with profits increasing 15.5 per cent in the first two months; followed by food processing of 13.3 per cent as well as power and heating supply of 21.1 per cent, the agency said.

China's economy is facing stiff headwinds as exports slackened while there are increased signs of softening domestic demand as Beijing keeps up its property tightening measures.

The HSBC flash purchasing managers index, the earliest indicator of China's industrial sector, showed that factory activity shrank for a fifth straight month in March, leaving investors fretting about the risks to global growth and anticipating fresh policy support from Beijing.

Reuters