The mainland failed to escape the ravages of the global financial crisis that swept the globe more than six months ago. Empty factories and lines of unemployed workers were testament to the growing reliance of the country on the globalised economy. But to use a now much-quoted phrase there are 'green shoots of recovery' sprouting in the third-biggest economy. There is ample evidence that China's economy may have hit bottom and entered a new phase of growth. The nation's key stock index has climbed more than 40 per cent this year as investors gain more confidence that the worst of the downturn is over. Indeed, after reporting sliding earnings last year, the investment community is expecting profits to improve at the mainland's listed firms. Banks and brokerages have unanimously revised upward their projections for economic growth this year on the back of the central government's huge stimulus package. Early signs are positive. First-quarter earnings have shown improvement, with quarter-to-quarter profit growth soaring by more than fourfold. Like a doctor checking for disease, the crucial organs of the mainland economy are being examined for their health and medicine is being prescribed. One remedy is for the nation to go back to basic manufacturing. Crucial to any recovery will be the manufacturing sector, which has for decades backed the country's phenomenal export growth. The nation's economy expanded 6.1 per cent in the first quarter, the slowest pace in 17 years but better than expectations. Other economic data also gives reasons to cheer an early recovery. But investors have been urged to retain some caution. 'The economic recovery is not in question,' said Essence Securities analyst Liu Jun. 'The question is whether the market has been overly optimistic.' According to TX Investment Consulting, the mainland's 1,624 listed companies earned a combined 821 billion yuan (HK$932.66 billion) last year, down 17 per cent from a year earlier. The drop was most drastic in the fourth quarter when earnings plunged 85.8 per cent on the year. Amid the downturn, however, giant state-owned firms maintained some of their cash-spinning advantage, thanks to the cosy monopolies they enjoyed in one of the world's biggest consumer markets. Among the 10 most profitable companies last year, six of them were commercial lenders who benefited from high net interest margins in the partially open financial sector. But overall, the gross profit margin of the mainland's listed firms hit a record low of 16.9 per cent in the fourth quarter last year, Shenyin Wanguo Securities reported. The low margin extended into the first quarter, it said. To prop up struggling sales numbers, companies increased marketing spending, but to little effect. Total revenue in the final quarter of last year dropped 7 per cent to 2.46 trillion yuan on the year, the brokerage said. To ensure economic growth, Fan Gang, a leading economist, recently urged the country to return to basics, to concentrate on manufacturing rather than the financial and services sectors. 'A lesson we can draw from the global financial crisis is that we shouldn't underestimate the manufacturing sector,' he told a financial forum early this month. 'Lots of our entrepreneurs are not happy with making leather shoes and socks. But it's not a bad thing to make these things. As long as demand for the daily necessities is there, there must be some companies to produce them.' Mr Fan's remarks are in line with Beijing's efforts to stimulate domestic consumption in the countryside. That along with massive fixed-asset investment in transport and other infrastructure emerged as a key driver for first-quarter growth. To date, the government has rolled out a package of incentives to shore up retail sales by subsidising farmers to buy home appliances. Over the past three decades since it adopted the open-door policy, China has emerged as the factory to the world - taking advantage of cheap labour to produce a range of low-value exports from cigarette lighters to garments. Thousands of small producers in the Yangtze River and Pearl River delta regions have prospered earning hard currencies from such endeavours. With mounting worries that a decline in exports would endanger the engine room of the mainland economy, some economic analysts have wasted no time in advocating an industrial upgrade. They suggest China develop its finance and service sectors to offset the losses from overseas orders. However, this is the wrong strategy, Mr Fan contends. He argues that the manufacturing sector will generate stable income for the country, though it is not easy to get rich overnight. Beijing is hopeful that robust domestic retail sales will help mainland manufacturers, crippled by the global collapse, out of their current doldrums. The export outlook remains cloudy at best. The China Export Commodities Fair in Guangzhou last week reported that orders fell 16.9 per cent from a year earlier. A Morgan Stanley report forecast that the country's exports last month were expected to fall 15 per cent and imports by 22 per cent. As such, the path to improved earnings will stay bumpy in the coming months. In the first quarter of the year, listed firms reported that profits tumbled 25.8 per cent from a year earlier. However, the combined earnings of 230.7 billion yuan represented a 450 per cent increase over the fourth quarter of last year. 'It comes as no surprise that China's first-quarter reporting season has been quite weak,' said Jing Ulrich, JP Morgan's chairman of China equities. But 'improving domestic demand and lower inventory levels suggest that industrial output should strengthen going forward'. A worrying sign is that deflation is still plaguing some crucial sectors such as the steel industry, which has been hit by overcapacity. 'We again expect to see year-on-year declines in all price indices in April,' said a Morgan Stanley report. 'We see producer price deflation worsening to 6.5 per cent in April ... at the consumer level we see deflation of around 1.7 per cent year on year in April.' The projected declines would extend the 6 per cent and 1.2 per cent slide in producer and consumer prices seen in March respectively, compared with the same month last year. These price declines have eaten into companies' profits with some offering discounts to clear inventories. According to TX Investment, 436 companies, or 26.85 per cent of listed firms, posted losses in the first three months. In the same period last year, more than 200 companies posted losses. Some analysts argued that the improved quarter-on-quarter earnings seen in the first three months were a result of the lower comparison base in the previous quarter and the government's support. Some sectors are also doing better than others in the budding recovery. The nation's three largest airlines - China Eastern Airlines Corp, Air China and China Southern Airlines - posted a combined loss of 27.9 billion yuan last year, dragging down the overall earnings of the 1,624 listed firms. But the carriers returned to the black in the first quarter. However, the steel industry, which reported first-quarter losses, will see the red ink increase in the coming quarter. The nation's benchmark steel price has dropped sharply as mills increased production, boosted by the government's 4 trillion yuan stimulus package. Baoshan Iron and Steel, the mainland's largest steelmaker, reported a 98 per cent drop in earnings for the first quarter. At the end of last month, the company further warned of a big profit decline in the first half. Baosteel said a recovery was foreseeable in the second quarter as demand from the vehicle and appliance industries was showing signs of an increase. While Beijing has pledged to stick to its proactive fiscal policy this year, investors have warned they should not get carried away with the improved prospects for earnings. While the green shoots of recovery are budding, the global financial crisis is far from over and there is a danger they could wither.