Profits at China's industrial firms shrank at a slower pace in May following a sharp fall in April, as activity in major manufacturing hubs resumed, but Covid-19 restrictions still weighed on factory production and squeezed factory margins.

Profits fell 6.5 percent from a year earlier, less than the 8.5 percent decline in April, according to data released by the National Bureau of Statistics (NBS) on Monday.

May's improvement was driven by surging profits in the coal mining and oil and gas extraction sectors, as the Russia-Ukraine war sparked a rally in global commodity prices.

However, profits in the manufacturing sector dropped 18.5 percent in May as equipment manufacturing improved significantly, Zhu Hong, senior NBS statistician, said in a statement. April profits were down a sharper 22.4 percent.

"Overall, the performance of industrial firms has shown some positive changes, but it should be noted that the year-on-year growth of industrial profits continued to fall, with rising cost pressure and difficulties in production and operation," Zhu said, adding that the foundation for recovery was not firm.

With production gradually improving from last month, the profit declines of industrial firms in Covid-hit Shanghai, eastern province of Jiangsu and northeastern provinces of Jilin and Liaoning all narrowed by more than 20 percentage points, Zhu said.

The gap between profit margins of upstream and downstream sectors narrowed in May, analysts at Goldman Sachs said in a note, adding the divergence of profits across various sectors and firms remained significant.

Some factories restarted operations in cities such as Shanghai following lockdowns but the weak property market and fears of any recurring waves of infections have cast a shadow over factory production and raised doubts over recovery in the world's second-largest economy. (Reuters)