Sector winners and losers in China’s new economic reality: Consumer and internet giants take center stage

Unlike the rapid-growth era of the past, China’s growth story has become far more complex. Shifts in government policy priorities, persistent pressures from involution, and escalating geopolitical tensions are driving deeper divergences across sectors, meaning investors need to be more selective.In the third note of our flagship Natixis China Corporate Monitor Series 2025, we analyze the performance of sectors in China and benchmark them with global peers. Beyond providing the usual sector ranking, we also offer a comprehensive, in-depth analysis of each non-financial industry within the investment universe, an enhancement from previous editions.Despite the weaker retail sales, consumer-related sectors are the most resilientChina’s retail sales remain below trend growth observed over the past decade, but the corporate performance of the consumer sector is relatively resilient versus domestic peers and global counterparts. Consumer staples stand out as the best performer as the only sector exhibiting stronger net income growth, higher profit margins, better returns on capital, and lower leverage than global peers in 2024.With the slowdown in nominal disposable income, diminished wealth effect and youth unemployment have weighed on confidence, consumption downgrading has emerged. However, consumers are shifting their preferences toward products and services that deliver higher value-for-money. Chinese firms have benefited from import substitution as they can offer cheaper alternatives to foreign brands.In consumer discretionary (ex. automobile), despite the cautious sentiment, Chinese consumers continue to spend more on education, culture and entertainment. This leads to an evolution of new consumption pattern in alternative products and experiences, such as gold jewelry and collectible toys. That said, these sectors are not big enough to offset the decline in big-ticket expenditures.While consumption has become a key area of policy support, pricing pressures and involution remain significant challenges, with growing divergence in performance across firms. Even within the strongest sector—consumer staples—our analysis reveals a clear gap between the average and median values. This indicates that overall sector resilience is being driven primarily by a handful of stronger performers only.For the luxury segment, our proprietary Natixis China Luxury Consumption Index indicates a further loss of momentum in luxury spending, with continued weakness in personal goods from their previous peaks, as well as in automobile sales. Meanwhile, stricter restrictions on alcohol consumption among government officials and state-owned enterprises have kept the wine and spirits market stagnant. The only area with improvement is hospitality, yet even here activity remains below 2022–23 levels.Communication services supported by milder regulatory overhaul and AI demandCommunication services rank second in our analysis of China’s corporate health. This strong position is due to low leverage, net income growth, and profit margins that are comparable to global peers, along with a reasonably high return on capital. It is a rare sector that Chinese firms can achieve similar profitability to global peers. The sector sees ongoing investment growth, without concerns on overcapacity or deflation.The robust performance can be attributed to two main factors. First, China had a significant regulatory overhaul targeting internet platforms from 2021 to 2022, leading to widespread concerns about policy risks and corporate revenues. This policy stance has since relaxed, especially following the DeepSeek moment and the government’s acknowledgment of the crucial role that private firms play in tech development.Second, the sector benefits from sustained demand for cloud computing and artificial intelligence. The Hang Seng TECH Index, a proxy for the overall market conditions affecting this sector, experienced the steepest earnings decline in 2022 of nearly 80%, which was worse than the Hang Seng Index (HSI) and the Hang Seng China Enterprises Index (HSCEI). Yet, it is also the only one to have shown a clear rebound, with earnings reaching 169% of the 2020 level as of August 2025. In China, the business income of the cloud technology and big data services industry has grown significantly by 4.1 times between 2019 and 2024, with its share of GDP rising from 0.3% to 1%.Renewables facing reconciliation of overcapacity, solution hinging on demandAfter two years of price wars, China’s renewable makers are widely posting losses and cutting capex. Since the start of 2025, the anti-involution campaign by the Chinese government has fueled some hype in the stock market. However, it’s a big question mark whether the price rise of raw materials can trickle down to final products which, if not, could further hurt firms’ profitability across the supply chain.Despite outperforming global peers, Chinese renewable firms’ fundamentals have largely weakened given the irrational competition leading to price wars and, thereby, shrinking margins. With overseas demand trending downward and domestic installation bound to slow down further (given the very large frontloading so far), the sector faces increasingly adverse market conditions with no easy fix in short term. The outcome of government’s anti-involution campaign mostly hinges on the demand which is elastic. Without a structural framework to boost green energy demand, the renewable sector may face an even longer consolidation period ahead.Focus on semiconductors, autos and real estateFor other sectors, we should highlight that China’s semiconductor industry has clear tailwinds of import substitution. Since the onset of Trade War 1.0, China’s share of the global semiconductor market has grown from 4.2% in 2017 to 6.3% in 2024. Chinese chipmakers are less profitable than global peers, but they are rapidly expanding the production of mature nodes, which can be another round of trade-off with higher sales volume but lower profit margins, which can affect the world on supply and prices.Another worrisome sector is automobile. While the green transition has given Chinese brands an edge, they find themselves in a dilemma. In trailing 12-month term, China’s passenger car sales are 18% higher than in 2018 as of June 2025. However, profits are at their lowest in the past decade as of June 2025 with only 77% of 2018. Despite the policy guidance on halting the price war, fierce competition and geopolitics may continue to keep prices low unless demand recovers, or industry consolidation happens.Lastly, the real estate sector will not yet see the light at the end of the tunnel. Home sales remain in the cycle where there is a temporary rebound following policy announcements but typically fall back to half of the pre-regulatory change levels seen in 2017–19. We do not expect property investment to recover anytime soon. The most likely scenario is an L-shape stabilization.Revenue generation ability is key down the roadLeverage is no longer a major concern for China's corporate health. What now distinguishes sectors in terms of outlook and repayment capacity is their ability to generate revenue and deliver returns on capital, which will only be more relevant as nominal growth continues to slow. Against this backdrop, sectors with lower demand elasticity, such as consumer staples, are likely to prove more resilient. That said, one caveat is the rising zombie share even within high-performing sectors, such as communication services. This suggests that strong sector-level performance may be concentrated among a handful of large firms, rather than broad-based momentum.