Here Is What Hurt China's Factory Profits

Tomohiro Ohsumi | Bloomberg | Getty Images

Data over the weekend showed profits among China's industrial firms rose about 5 percent in March from a year earlier, down from a 17 percent rise in the first two months of the year, stoking fears over slowing growth in the world's second largest economy.

But analysts say the fall in profit growth could be temporary as companies hold off on big decisions until the new government clarifies its policy direction.

"Of course whenever you see something declining it's a worry, but I would expect the turn down in industrial profit figures to be a temporary thing," said Jackson Wong, vice president of Hong Kong-based Tanrich Securities.

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According to Wong, the reason for the above decline is due to company directors and investors putting decisions on hold until the new leadership regime clarifies its policy direction.

China's new leadership under President Xi Jinping, which took over in March, faces a wealth of difficult tasks ahead, including re-balancing China's economic model from an investment led to a consumer based one, together with tackling an overheated property market, heavy levels of pollution and public outcry over corruption. Plus, concerns over China's slowing growth have heightened in recent times, after 2012 marked the country's weakest annual growth since 1999.

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"Over the past few months everything has slowed down. We are still waiting for the new leaders to announce their policy regime and until that comes out everything has been put on hold," said Wong. "It is just like prior to the U.S. election last year when everyone was waiting to see what the new leaders would do," he added.

Wong expects clarity to emerge by the second half of 2013, prompting a surge in business activity: "When we do see a clearer policy direction I expect the pick-up to be robust," he added.

(Read More: Has China's Economy Hit a 'Dead End'?)

Audrey Goh, investment strategist at Standard Chartered bank, agreed that a hold-up in decision making within Chinese companies had contributed to the weak industrial profit figures.

"It seems that the reform agenda will be high on the list of priorities, which means some of the state-owned companies might suffer as preferential treatment gets cut back," she said.

"Although in the long-run reform will be positive for Chinese companies, in the short-term there could be some uncertainty," she added. She expects muted industrial profit growth for the next two quarters.

Shopping district in Beijing, China
Grant Faint | The Image Bank | Getty Images
Shopping district in Beijing, China

A report from Bank of America Merrill Lynch forecasts industrial profits figures will improve next quarter, blaming recent weakness on soft sales figures.

"For the next few months, we expect to see a modest recovery in demand, which could cause earnings growth to edge up," said Bank of America Merrill Lynch.

Investors will now be closely watching the official Chinese Purchasing Managers' Index (PMI) for April set to be released on Wednesday.

Meanwhile last week's HSBC flash PMI fell to a two-month low of 50.5 in April from 51.6 in March. A reading of 50 and above indicates expansion, while one below signals contraction.

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