Editor's Note: Alicia Garcia Herrero is the NATIXIS chief economist for Asia and a BRUEGEL senior research fellow, and Jianwei Xu is a Natixis economist for Asia Pacific. The article reflects the authors' opinions, and not necessarily those of CGTN.

No economy can keep growing at high speed forever, and this is also true for China. With more awareness of financial risk and the pursuit of sustainable growth, investors need to dig deeper to find opportunities. As such, there could be greater divergence among sectoral performances. It is, therefore, crucial to analyze the financial health across China's corporate world before making investment decisions.

There are two angles to analyze sectors. First, we can look from the vertical comparison across sectors within China as regards financial health. This approach is essential for investors interested only in China but neglects the sectoral uniqueness. Second, we can have a horizontal comparison of each sector in China with global peers to show whether the sector is doing above average or not. The two approaches would cater to both purposes for investors and draw the full picture of corporate financial health in China.

Within China, sectors related to urban development and the rising middle class have relatively good financial health. The common features for utilities, consumers and energy have sounder leverage, more stable revenue dynamics and better return on capital. On leverage, the share of short-term to total liabilities is small for utilities and energy, forming an oasis from the heavy reliance on short-term financing in most sectors. On revenue, the profit margin is still resilient for the utilities and telecommunications sector, albeit slightly underperforming real estate. 

Without doubt, the real estate sector is the elephant in the room given its sheer size in the Chinese economy. Although we believe real estate is a grey rhino due to its high leverage, it could still be interesting as an investment opportunity, especially for property giants which are too big to fail. The uniqueness is that the revenue stream has been strong, allowing the sector to keep a stable repayment ability and a relatively high return on capital.

The lucrative return is also largely built on leverage and a high interest burden. A notable downside risk in the future is that more sustainable growth in home price does not necessarily mean property developers can sustain financial health, especially with the unchanged policy tone that "housing is not for speculation." And the debt structure means the liquidity risk remains since the game of musical chairs could be suddenly stopped by a stricter regulatory stance that could limit sales of real estate. While large developers have clear advantages in land acquisitions and the availability of funding channels, the situation is peculiar for small developers given their heavy reliance on shadow banking and the increasing higher market concentration geared toward large players.

Conversely, the financial health of renewables and technology-related sectors remain challenging due to the rapid reduction in revenue and a low return on capital. Even though these new sectors are supported by government policies, their financial health in the short run remains weaker than other sectors in China.

When compared to global peers, utilities once again remain the best sector with favorable debt and revenue conditions as well as return on capital. The relative better performance may be attributed to ongoing demand, a relatively protected market structure and a large role from the state in the sector, which essentially means more steady income, higher profit margins and lower interest rates than global peers. Although the production price index underwent severe pressure in 2019, utilities are one of the few sectors that retained positive growth, especially when compared to other upstream industries. Although it is true that slower economic growth could reduce future potential demand for electricity or water, the steady price level bodes well for the utilities sector to sustain its robust earnings.

In addition, although renewables and infrastructure do not perform well when it comes to financial health within China, these sectors excel versus global peers, indicating that challenges exist globally and Chinese firms are performing better.

On the weaker end, the financial health of semiconductor, ICT and health care sectors is noticeable, especially versus global peers, in their low return on capital. The semiconductor and ICT sectors are squeezed by tighter profit margins and lower returns on capital versus firms from the U.S. and Europe. The downstream role in semiconductors and ICT is one of the reasons but the effort to invest further and be competitive in pricing is also weighing down their short-term financial health. Despite the opportunities from an aging demographic, health care firms face a tightly regulated environment that limits revenue potential.

All in all, it seems that the most boring "old China" type sectors, such as utilities, will provide better investment opportunities for 2020 than the sexy "new China" sectors, such as semiconductors, health and ICT.  This is especially the case if one considers the very expensive valuations of these new sectors compared to the old ones.

Please contact editor Wu Gang (wu.gang@cgtn.com) to contribute a business analysis piece to CGTN.