NATIXIS China Corporate Monitor 2025 - China: Private firms lead in capital efficiency and innovation while state-owned giants rely on policy support

In the first note of our Natixis China Corporate Monitor 2025 series, we draw the conclusion that Chinese firms now face a bigger problem of revenue than debt. This time, we analyze the diverging fortunes of Chinese firms based on their ownership structure, including central state-owned enterprises (SOEs), local SOEs, and privately owned enterprises (POEs). With policy and regulatory changes, uneven financing conditions and shifting demand, their corporate health has been evolving, leading to a significant impact on the macro economy and investment decisions. Uneven benefits from fiscal and monetary policyAlthough the stimulus scale is weaker than in 2008 or even 2016, China has stepped up its efforts to stabilize growth. On the fiscal side, the government has increased spending on national infrastructure projects, clearly benefiting central SOEs. Local governments have also increased their special bond issuance, but the positive impact on local SOEs has not been obvious. On the monetary side, the People’s Bank of China (PBoC) has lowered policy rates quite slowly, but these have not been passed on to POEs as quickly as expected. Due to the uneven impact from policies, there is now a growing divergence among large state-owned SOEs and private firms on metrics, such as fixed asset investment.► Central SOEs: A balancing actAmong different groups, central SOEs appear relatively stable. They benefit from preferential access to lower interest rates and retain some capacity to increase leverage. Although they still face pressure from the general slowdown of corporate revenue, they have lighter debt burdens and improved repayment ability thanks to lower interest rates. This balanced position stems largely from their strategic importance and close ties to central government policy support. On credit risk, a key indicator of distress is the “zombie ratio”—the share of firms with an EBITDA-to-interest expense ratio below 1, meaning they fail to cover interest costs from income. This has led to a relatively stable ratio at 8.5% in 2024.► Local SOEs: Under the most strainIn contrast, local SOEs confront the greatest headwinds. Their revenue has been declining, leading to a deterioration of return on capital. Without proactive deleveraging and the aid of lower borrowing costs, their repayment capabilities would have worsened substantially. This signals that local governments may need to think of another burden coming from the poor profitability of their enterprises. Alarmingly, local SOEs exhibit a higher zombie ratio of 14.7% in 2024 when real estate is excluded, surpassing the 13.9% ratio observed including real estate. ► POEs: Divergent recovery and innovation-driven growthWhile POEs see a cyclical rebound in income growth, they have not experienced the same relief as SOEs when it comes to interest expense. And yet, POEs are the only group showing an overall increase in return on capital with still growing R&D expenditure. This suggests that innovation and adaptability remain POEs’ key competitive advantages. One risk is this improvement is uneven and concentrated in larger firms and some sectors, such as internet platforms.When shifting focus to median firms rather than averages, the income growth and profit margins of POEs have declined significantly, reflecting intensifying deflationary pressures in the economy and pervasive difficulties in passing higher costs onto customers. With a weaker nominal growth rate, the competition has become way fiercer in competing for sales volume. This is also reflected in the overall zombie ratio of 12.5% in 2024, rising from 6.8% in 2018.Divergent pathsOur analysis points to local SOEs facing the greatest revenue and financial stress, with a very rapid increase in zombie firm, beyond real estate. Central SOEs maintain stable leverage and repayment ability while private firms outperform in return on capital and innovation despite the overall deleveraging and cautious investment trends. Finally, corporate health appears to be increasingly polarized with smaller firms doing worse.