Natixis China Corporate Monitor?offers a bottom-up analysis of the financial health of the 3000 largest listed corporates in China* covering the period between 2014 to the first quarter of 2021. As many as 14 sectors are covered and their financial health compared with that of 3000 global peers. Financial health is defined as a combination of debt dynamics and revenue generation as well as return on capital. Beyond the sectoral comparison, we also investigate differences depending on companies’ ownership and size.
- The world is rebounding from the pandemic but in different stages. China has now reached its cyclical peak in economic rebound, and the baton is passed to US and Europe with strong recovery and fiscal stimulus.
- Such shifting patterns of growth have been reflected in corporate health and asset prices.?The improvement in Chinese corporate health is more than global peers in 2020, despite the absolute level is still lagging.?However, the divergence between Chinese corporates and global peers has narrowed in 2021, especially as the favorable base effect in revenue growth will weaken in China compared to the rest of the world.
- Interestingly, the improving repayment ability of Chinese firms is not enough to tame bond defaults,?especially with the trend of credit risk polarization. More firms are facing difficulties in financing but for different reasons. The debt dynamics for state-owned enterprises (SOEs) has worsened versus 2019. For private firms, they are not insulated from credit risks despite better repayment ability. With tighter curb on targeted financing and thus the potential higher funding cost, pressure is mounting in the property sector, which is mostly privately owned.
- Still,?one of the spotlights is the aggressive investment in the new economy,?especially in semiconductors, consumer and health care. This reflects the policy-driven deleveraging in the old sectors and the growing importance of the new economy. However, the new economy in China generally has a lower return on capital than global peers, and the high profit margin may not be guaranteed in the future.
- Within China, the energy sector has the best corporate health within China due to the elevated commodity prices. Consumer and semiconductor have both performed well with the growing new economy and the structural changes after the pandemic. Comparing to global peers, Chinese airlines has the biggest positive divergence due to the resumption of domestic flights. Energy, renewables, and utilities are also among the best led by stronger revenue generation. In turn, real estate is trailing global peers, dragged by poor debt dynamics.
- Going forward, the evolution in corporate health and regulations will be the key drivers for market performance. As firms begin to release 2021 Q2 results, the numbers are expected to be good. However, the real test will arrive from 2021 Q3 onwards, especially for the sectors targeted by tighter regulations. The policy uncertainties may also discourage private investment until the regulatory red line is clear. As such, the future of Chinese corporate health is likely to be a net result of better debt dynamics but more challenging revenue generation.
Full report is available for Natixis clients.
