Last year's total profits at the biggest state industrial firms declined 5.7 percent from a year earlier to 1.4 trillion yuan (149 billion pounds) versus a 6.4 percent rise to 1.5 trillion yuan in 2013.

Beijing is set to start publishing a series of planning documents before the end of March aimed at boosting the performance of state enterprises, which is widely expected to be the most ambitious reform of government-owned industry in nearly two decades.

Shrinking profitability at state-owned companies was "very normal and foreseeable", as companies prioritised structural reforms and upgrades, said Zhang Chunxiao, professor of economics at Peking University and adviser to the State-owned Assets Supervision and Administration Commission.

The new data will "motivate the Chinese government and state-owned enterprises to think carefully about how to step up structural reforms, upgrading traditional industries to improve their ability to survive market competition and developing emerging industries and technology innovation," Zhang said. State-owned enterprises were hit by surging operating costs, notably a 19.2 percent jump in financing expenses from a year earlier, the Ministry of Finance said in a report last Thursday.

The Central Commission for Discipline Inspection (CCDI), the Communist Party's anti-graft authority, is targeting insider corruption at 53 strategic state firms, including China Southern Airlines Co (>> China Southern Airlines Co Ltd) and China Unicom (>> China Unicom (Hong Kong) Limited), in a bid to prevent the loss of state assets during the reform process.

The CCDI has sent inspection teams into scores of government-owned conglomerates over the last two years, placing 21 executives under investigation for wrongdoing.

Profits at China's large private firms reached 2.2 trillion yuan last year, up 4.9 percent from 2013, according to the statistics bureau, while overall China's factory profits grew at their weakest rate in two years in 2014.

(Reporting By Matthew Miller and Beijing Newsroom; Editing by Eric Meijer)