Earnings of Chinese industrial firms saw a narrower drop last month and are set to further pick up as domestic demand recovers, officials and analysts said on Monday.

They also urged more efforts to rescue exporters and small manufacturers facing mounting headwinds from the COVID-19 pandemic.

Profits of major industrial firms in China fell 34.9 percent on a yearly basis in March, improving from a 38.3 percent decline for the first two months of the year, the National Bureau of Statistics said on Monday.

Total first quarter industrial profits stood at 781.45 billion yuan ($110.4 billion), down more than one-third year-on-year, the NBS said.

"Production resumption sped up continuously while sales of industrial goods started to recover, leading to positive changes in corporate earnings last month," said Zhang Weihua, deputy head of the bureau's Department of Industrial Statistics.

Yet Zhang noted that challenges to industrial profits remained. "Market demand has not recovered completely but inventory levels have risen a lot. The drop in industrial goods prices was sustained and cost pressures were still heavy."

He urged putting into place policy measures to promote economic stability and help enterprises stay afloat during the difficulties.

The pickup in industrial earnings was modest last month as demand recovered slower than production, said Yang Weiyong, an associate professor of economics at the University of International Business and Economics in Beijing.

"But there is no need to panic. The contraction in earnings of most industrial sectors should substantially narrow in the second half of the year as domestic demand recovers," Yang said. He also underscored the importance of offering more tax relief and financial aid to hard-hit exporters as well as small businesses.

The NBS said the beverage, electronics and high-tech manufacturing sectors led the recovery last month, with their year-on-year profit growth turning positive after declines of more than 20 percent in the previous two months.

The country's expedited infrastructure investment also will shore up profits of sectors like metals, chemicals and machinery, analysts said, while calling for more precautionary steps due to risks facing industrial firms as a result of the external environment.

Zheng Ying, a senior researcher at the Financial Research Center of Bank of Communications, cautioned that weakening external demand due to the COVID-19 pandemic and the low international prices of oil and other bulk commodities may hamper the improvement in industrial profits.

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