Soft demand growth will bump against oversupply for many of China's industrial sectors in 2025. In this environment, policy remains a key driver of sector trajectories.

A trade-in policy, for example, will modestly lift auto consumption despite weak consumer confidence. Debt relief programs for local governments could partially accelerate payments to engineering and construction (E&C) firms. At the same time, equipment makers supplying the coal-fired power sector will see further momentum on policy support.

The key industrial sectors S&P Global Ratings covers in China are auto and auto parts, E&C, and capital goods. The majority of the rated industrial firms are industry leaders that, in our view, can adapt by improving cost structures and business mixes, tapping the overseas market and being disciplined with investments. These defensive actions should help them largely absorb industry volatilities, though some could see thinning rating buffers.

Auto: Price Wars And Margin Pressure To Persist

Weak demand and rising trade barriers will weigh on China's automakers and suppliers. Price wars in the domestic car sector might not abate until more competitors are shaken out, a process that could take several years. The consolidation process may include exits by some of the foreign brands that have lagged in the transition toward electric vehicles (EV).

We assume 0%-2% growth in China's domestic light vehicle unit sales this year, reflecting consumers' cautious spending on big-ticket items. The scrappage and trade-in program launched in 2024 fueled new car retail sales from September and partially pulled forward demand. While the government extended the policy to 2025 with a slightly expanded scope, we don't expect this to materially push up auto consumption, given the gloomy economy outlook and rising global trade frictions.

Upside risk to our base case would emerge if consumers meaningfully advance EV purchases in 2025 before a 5% purchase tax is introduced next year. We already anticipate the domestic unit sales of electric passenger vehicles will rise 20% year-on-year, lifting EV penetration above 45%.

China's top domestic carmakers will further scale up as part of the steady EV transition, while the traditional foreign auto original equipment manufacturers (OEMs) struggle to protect volumes. Some of the large-scale international carmakers will likely launch more competitive EV offerings from 2026. If unsuccessful, they could permanently lose their foothold, facilitating industry consolidation.

Shrinking profit and deteriorating liquidity squeezed out a few small EV startups in the past year. More players are likely to come under strain in the next 24 months.

Industry concentration can also improve if the state-owned carmakers merge under government directive; we note that two such carmakers recently put out statements that indicated potential restructuring.

Sales targets are ambitious

Of the key auto makers that we track, only three met their sales target in 2024 (see table 1). Intense competition at home and decelerating growth in exports will put their 2025 volume targets at risk. Growth in China's auto exports will decelerate this year, after a record high 6.4 million units in 2024. Higher import tariffs, increasing scrappage fees, elevated interest rates and tight lending policy will constrain auto consumption in major markets, including Russia and Southeast Asia, and hence demand for China's exports.

Table 1

Despite China's soft growth and continued price wars, we expect the majority of the rated carmakers and auto suppliers to maintain largely steady credit profiles. Their solid market position, good product offerings and sound financial buffer mitigate the margin and cash flow strains.

We recently revised the rating outlook on Geely entities to stable.  In our view, improved EV offerings and intra-group integration will underpin solid volume growth and continuous margin expansion for the group ("Zhejiang Geely Holding, Subsidiary Geely Auto Outlooks Revised To Stable On Expected Margin Recovery; Ratings Affirmed," published on RatingsDirect on Jan. 22, 2025).

For China FAW and Beijing Auto, we see rating headroom reducing.   While both these companies have sturdy financial headroom, their lack of competitive EV products is testing their competitive positions.

Table 2

Contemporary Amperex Technology Co. Ltd.'s  competitive products and solid relationship with global auto OEMs will underpin its continual expansion in China and Europe. Better product mix, improving economies of scale and stringent cost control help moderate the impact from additional U.S. tariffs. We also expect the company to exercise caution in capacity additions and remain in net cash.

Yanfeng International's  fast expansion in EV segments and its widening customer base will support healthy business growth. We also expect the company's improving product mix and stringent cost controls to help mitigate pricing pressure and the impact from U.S tariffs.

Johnson Electric  sources about 25% of its revenue from the U.S and a majority of this is supported by products exported out of China and Mexico. This subjects the company to higher trade barriers than other rated peers. That said, we expect competitive products, prudent cost management and potential production reshuffles will help the company to moderate the tariff pressure and keep its margins healthy.

Table 3

Engineering And Construction: Receivables Turnover Drives Rating Headroom

Rated E&C companies are coming into the new year on a weaker footing. Intense competition and weakened funding conditions for project owners strained cash flows and pushed up their debt and leverage in 2024, based on financial performances in the first three quarters of last year.

Our base case bakes in 1%-3% revenue growth for the rated constructors in 2025. Tightened controls on public-private-partnership (PPP) projects, declining new starts of residential properties, and slowing capacity expansion in many manufacturing sectors will keep construction demand tepid. Growth for China's E&C sector will mainly come from infrastructure construction, which is used as a counter-cyclical measure to shore up economic growth.

On the bright side, we anticipate slight margin improvements for the rated entities. This will stem from stricter project management, stepped-up cost controls, stabilizing property development segments, and lower impairment provisions.

Earnings growth and a likely shorter receivables collection cycle may improve E&C companies' operating cash flows this year. In our view, the central government's debt swap plan announced in late 2024 can provide some relief to local governments and free up capacity to undertake more projects. This could gradually speed up cash collections for constructors. Additionally, with declining capital expenditures, the rated E&C firms should deleverage slightly in 2025, albeit from a high level.

Key risks to our base case are intensifying pricing pressure and funding conditions for project owners not improving as we now expect. Some issuers, such as Beijing Construction Engineering Group Co. Ltd. (BCEG), Power Construction Corp. of China (PCCC), China State Construction Engineering Corp. Ltd.(CSCEC) and China Railway Construction Corp. Ltd. (CRCC) could be vulnerable to downward rating pressure if they face material working capital outflows or escalating competition. Their financial headroom narrowed in 2024 due to deterioration in receivables turnover.

Chart 1

Among the peers, Shanghai Construction Group Co. Ltd. (SCG) and China State Construction International Holdings Ltd. (CSCI) are more resilient.

SCG will remain the market leader in Shanghai's E&C market with an over 50% market share over the next two years. Modest profit expansion and disciplined capital expenditure will keep its free operating cash flow positive and support gradual deleveraging during the period.

CSCI will maintain its strong market standing in the E&C markets in Hong Kong and Macao for the next 24 months. The company is shifting to shorter-term projects in mainland China and lowering its investment appetite. This will improve cash flows in 2025-2026, and allow for modest deleveraging during the period.

Capital Goods: Benign Demand Supports Steady Credit Profile

Rated capital goods names will be able to overcome tough macro-conditions. In our view, they will see moderate earnings growth on solid market positions and healthy orderbooks in their respective key sub-sectors. This combined with disciplined investment will keep financial headroom at sufficient levels.

China's "3 80 GW" policy is fueling growth in coal-fired power equipment new orders. This program calls for commencing construction on 80 gigawatts (GW) annually of coal-fired power capacity in 2022-2023 with at least 80 GW in new capacity installed in 2024. This will support revenue growth for industry leaders over at least the next 24 months, given the delivery cycle.

Demand for nuclear power equipment has also been steady, as China targets to produce 10% of its electricity from nuclear power by 2035, up from 5% in 2023.

New orders have also been ticking up for the wind power equipment, thanks to accelerated project approvals amid China's energy transition. We see signs of recovery on the bidding price for wind turbine generators after consecutive declines post the rush of installations in 2019-2020 to meet subsidy deadlines. Major turbine manufacturers entered into an agreement in late 2024 to promote disciplined pricing strategy. However, the sustainability and magnitude of the recovery in price remains uncertain given the intense competition. 

As one of China's top producers for coal-fired and nuclear power equipment, Shanghai Electric Holdings Group Co. Ltd. is well positioned to capture the growth opportunities. Expansion in these two segments will temper potential revenue decline from wind power equipment, elevators, and integrated service businesses. Our base case assumes a modest increase in total revenue over 2025-2026.

Shanghai Electric's working capital management will also improve as consumers (thermal coal plants) advance payments to accelerate the installation of power equipment. At the same time, a better product mix, improving operating efficiency, and more cautious capital spending will keep free operating cash flow positive, underpinning steady leverage over the next 12-24 months.

Chart 2

We expect demand for railway equipment to also remain healthy in 2025. Passenger travel will likely stay strong after hitting a historical high in 2024, supported by solid business travel and more tourism travel. More tendering opportunities for electric multiple units and higher maintenance needs will support moderate revenue and profit growth for CRRC Corp. over 2025-2026. We expect the company to generate positive free operating cash flows and remain in a net cash position.

Table 4

Testing Times

The industrial landscape could be trying for a good few years. In our view, some of the current policy supports have moved forward demand. That could lead to a hangover in 2026, especially if economic conditions have not regained enough momentum. Sectors exposed to China's energy markets are likely to get more mileage out of China's policy actions.

Many unknowns persist on the global front. Our stress tests show that the rated Chinese auto makers and suppliers can manage the currently planned additional 10% tariff on China and potential 25% on Mexico. This is given their small exposures.

However, should trade frictions further escalate the Chinese economy would be badly hit.

A 60% across-the-board tariffs--as warned at various times--would indirectly hit consumption, including for major items like autos. Chinese industrial names that aspire to become international leaders would face a double test, with soft demand and oversupply at home, and combative conditions abroad.

Related Research

• Impact Of U.S. Tariffs On China's Auto Sector: Watch For Second-Order Effects, Feb. 11, 2025
• Zhejiang Geely Holding, Subsidiary Geely Auto Outlooks Revised To Stable On Expected Margin Recovery; Ratings Affirmed, Jan. 22, 2025
• China Engineering & Construction Sector 2025 Outlook: Difficult Industry Conditions Could Tighten Rating Headroom, Jan.15, 2025
• Industry Credit Outlook 2025: Autos, Jan.14, 2025