Executive Summary - Chinese corporates struck by the trade war and the pandemic, but still better than harder-hit global peers
After the immense disruptions from the trade war, Chinese firms have taken a subsequent shock from the Covid-19. The financial health of Chinese firms has indeed deteriorated since early 2019 as the US-China strategic competition widened from targeted tariffs to a larger realm of issues, including technology and related sanctions. But the Covid-19 shock constituted an even sharper drag. Not only did the economy collapse in Q1 2020, deflationary pressure has accelerated.
A direct consequence of slower economic growth is on weaker corporate health and repayment ability. Chinese policy makers have reacted with monetary stimulus first, which was tamed from May 2020, followed by fiscal stimulus. What is different between China and the world is the economic recovery has brought a lifeboat to Chinese firms, which is not the case for global peers. Beyond the relatively more positive revenue stream from Q2 2020 onwards, Chinese firms have also continued to invest while global firms are retreating on capex.
Although the expansion is slower than the past, capex growth for Chinese firms still positive. But it comes with an important bias that most of the capex is stemming from state-owned enterprises (SOEs). The countercyclical behavior also means SOEs have further increased their leverage due to the ongoing capex growth and the burden of operational costs. Therefore, the financial health for Chinese SOEs has worsened more than private firms, but still perform better than global peers.
Within China, the consumer sector is the healthiest due to favorable debt situation and higher return on capital. The new economy (telecom and semiconductor) has also performed well, followed by utilities. At the other end of the spectrum, aviation is the worst due to the collapse in operating income, followed by infrastructure and real estate. But the comparison with the world shows a different picture. Chinese airlines are in a better position due to the fast recovery in domestic flights. Renewables, energy and utilities are also among the best compared to global peers due to lower leverage. In turn, ICT and semiconductors are trailing global peers. The gap shows the challenges of China in climbing the tech ladder, especially with sanctions from the US.
All in all, Chinese firms have been hit by the trade war and Covid-19, but they have recovered faster than global peers, which equates to a better relative performance. Although the revenue stream and the return on capital have improved for most Chinese firms, debt has continued to pile up while funding costs are moving up again after a sharp reduction at the peak of the pandemic. This is in line with a tighter monetary policy and the perception of higher risk on the back of several iconic defaults, especially for SOEs. The glass is half full and half empty: Chinese firms have better relative performance versus global peers but with risks piling up as leverage continues to increase on the back of meager but recovering revenue generation.
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