Alicia Garcia-Herrero is senior fellow at Bruegel and chief economist for Asia-Pacific at French investment bank, Natixis.

Chinese listed companies earned a profit margin of roughly 4.5% in the first half of 2026, about half the nearly 9% racked up by their global peers. Their return on capital is around 6%, against more than 11% elsewhere. Those are the main findings of Natixis' latest China Corporate Monitor, which compares some 2,300 mainland firms with 9,000 global competitors. The official reading in Beijing is that corporate health has stabilized. A more accurate reading is that it is being held in place by one support: falling interest payments, and that support is nearly used up.

The mechanism is simple. The standard measure of a company's ability to service its debt is earnings before interest, taxes, depreciation and amortization divided by interest expense. On that measure, Chinese corporates look broadly stable at 8.8 times. But the stability comes almost entirely from the denominator. Interest expense has fallen by 0.5% from 2024 to June 2026 as the People's Bank of China cut policy rates and banks repriced loans downward. The numerator has not recovered. Revenue growth remains at 3.9% compared with 7.9% before the COVID pandemic, and margins have stopped falling only because firms have cut costs. Chinese companies are not earning their way back to health. They are being refinanced into it.

This cannot continue indefinitely, for three reasons. First, banks are absorbing the cost. Their net interest margins are already at record lows, and each additional rate cut erodes the capital buffers they will need if credit quality deteriorates. Second, deflation keeps real interest rates high even as nominal rates fall, so the relief to borrowers is smaller than the headline cuts suggest. Third, the lower rates go, the less each further cut delivers. Once the denominator stops shrinking, debt-servicing capacity will track revenue, and revenue is the problem.

One might expect this to be a story about the old economy: property developers, local state-owned enterprises, and heavy industry with overcapacity. It is not. The sectors Beijing has promoted as "new quality productive forces" show the same pattern. Electric vehicles, batteries, solar and wind equipment, and semiconductors have all received generous subsidies, cheap land and preferential credit.

Employees work on the production line at a Nio electric vehicle factory in China's Anhui province in 2025. The country's electric vehicle makers have enjoyed lucrative subsidies.

That support produced capacity faster than demand, and the result has been price wars the leadership itself now calls "involution." Revenue growth in these sectors is -4% in the first half of 2026, margins are 2%, and their repayment ability has improved only because funding became cheaper. Renewables, the best performer in our ranking only two years ago, have fallen to near the bottom. The industries meant to carry China's next growth model depend on the central bank for their financial health as much as the industries they were meant to replace.

Ownership adds a second layer. Central state-owned enterprises are doing relatively well because cheaper funding has offset weaker sales, and the system channels resources toward them. Private firms remain more profitable, but they survive mainly by exporting. The result is two separate corporate economies: one sheltered by the state, the other competing abroad because the domestic market cannot absorb its output at a profit.

This is why corporate health should become an explicit policy priority rather than a by-product of monetary easing. Four steps would help.

First, measure it properly. Regulators should track debt-servicing capacity excluding the effect of interest rates, so that improvement driven by earnings can be distinguished from improvement bought with rate cuts.

Second, address demand. Revenue will not return to normal levels while household income and consumption remain weak relative to output. Supply-side discipline cannot fix a shortage of buyers.

Third, allow exit. The share of zombie firms in our sample has doubled since 2018. Bankruptcy procedures that actually work, and local governments willing to let insolvent champions fail, would do more for margins than any price-coordination campaign. The anti-involution effort should mean consolidation, not cartels.

Fourth, clear the arrears local governments owe their suppliers. Unpaid bills are a hidden tax on private firms' cash flow, and paying them would raise revenue without raising debt.

The stakes extend well beyond China. Firms with thin domestic margins export more aggressively, and China's trade surplus, now around $1.2 trillion, shows it. Europe, with less protection than the United States, absorbs a disproportionate share of that pricing pressure in exactly the sectors where it is trying to build its own industrial base. And if the interest-rate cushion runs out before revenue recovers, the adjustment is likely to come as a credit event passing through Chinese banks and local governments rather than as an orderly shakeout. Europe should watch Chinese corporate balance sheets as closely as it watches Chinese trade data. Each is the other's cause.