[Presentation] NATIXIS China Corporate Monitor 2025 - Corporate health hurt by lower profit margin even if supported by cheaper funding

China's corporate health has remained stable on an aggregate basis, with unchanged repayment ability in 2024. However, there is growing polarization between large and small firms, which explains why growth appears decent while confidence remains weak. This trend points to higher credit risk with the share of zombie firms rising from 6% in 2018 to 12% in 2024. Despite the overall stability and supportive interest rates, pressures on revenue and profit margins have increased.The key issue has shifted from leverage to profit margins. Firms can generally increase sales volumes, but profit margins are deteriorating, especially for smaller firms with limited pricing power and resources. The good news is that Chinese firms have begun to self-correct overcapacity by reducing investments. This, however, is still allowing for growth in R&D expenses.When it comes to company differentiation by ownership, local state-owned enterprises (SOEs) are facing the most headwinds. Their repayment ability would have worsened further without lower interest rates, and the pressure on revenue is tougher than for other corporates, adding to the stresses on local governments amid a range of other issues (e.g., land sales). In contrast, central SOEs are relatively stable, as lower interest rates have offset revenue pressures and improved repayment ability. Private firms see limited policy support despite their higher returns on capital.Regarding sectors, consumer staples and communication services are the best performers in financial health, due to still-resilient consumption and demand for AI technologies. Despite slower economic growth, domestic substitution has helped Chinese firms gain market share.Being the hardest hit by geopolitics, the ICT and semiconductor sectors are in the middle of the pack within China and perform relatively poorly compared to global peers. Despite strong policy support and decent income growth, Chinese firms in these sectors have more short-term debt and lower profit margins. They are also one of the sectors with higher overseas revenue exposure. Still, semiconductors enjoy the fastest growth in R&D expense, as one would expect given the strong support through industrial policy.In contrast, the renewables sector has slipped from being the best performer to among the worst sectors in China, even though it remains competitive globally. There has been a hype in the Chinese renewable market jolted by the government's anti-involution campaign. While policy efforts are being made to reduce overcapacity, the problem appears to be structural. Moreover, the lack of power transmission capacity leaves more renewable projects idle, indicating that China needs to increase investment in its power grid.Therefore, profit margins are the number one concern for Chinese firms now, and this issue will likely persist, especially if Trump’s tariffs are not further lifted or if other countries impose similar tariffs. The growing number of zombie firms indicates that credit risk is on the rise in China, particularly for smaller companies. Overall, unless there is a recovery in nominal growth, opportunities in China will remain selective, making ongoing assessments of China’s corporate health relevant for investors.​