China's export machine is running at full throttle, consumer demand is buoyant and the overall economy is growing as strongly as ever. Yet China's companies are finding it tougher and tougher to actually make money.
Despite fears of a slowdown, China is almost certain to announce economic growth in excess of 9 per cent year on year, when gross domestic product data for the first half of the year are released later this week.
China's trade figures by themselves practically guarantee a strong economic performance.
On Monday, the mainland's customs authority announced an astonishing US$10 billion trade surplus for June alone. For the first half, the figure was US$40 billion, more than for the whole of last year, as export growth outstripped import growth by 33 per cent to 14 per cent.
Because of the way GDP is compiled - with exports adding to output and imports subtracting from it - the trade figures are a good indicator of robust economic growth. So too is private consumption, which continues to grow at double-digit rates, according to economists.
However, the rosy big picture obscures the growing pain being felt at the corporate level in China. Debt-fuelled over-investment - fixed-asset investment now accounts for more than half of China's economy - has spawned cut-throat competition, which has prevented companies from passing higher costs on to their customers.
Although producer prices are increasing at an annual rate close to 6 per cent, consumer prices have risen less than 2 per cent over the last year and less than 1 per cent if food prices are stripped out.
As a result, corporate profit margins have been squeezed. According to Deutsche Bank, the proportion of Chinese companies losing money in May almost doubled compared with the same month the previous year, up from 6 per cent to 11 per cent. The amount of corporate losses is rising 60 per cent year on year (see chart).
And the business environment is likely to get worse before it gets better. According to Xavier Farcot, deputy general manager at credit insurance company Coface Hong Kong, too many companies have expanded too rapidly with too few internal resources, by relying excessively on short-term bank loans and vendor financing.
Mr Farcot believes the coming months will throw up more cases like refrigerator-maker Guangdong Kelon Electrical Holdings, which has run into financial difficulties despite strong demand for its products.
Coface warns that further corporate troubles could trigger a domino effect, given the tendency of mainland companies to rely on financing from their suppliers. If a customer gets into difficulty, the problem can go back up the supply chain, plunging otherwise sound companies into loss, regardless of the pace of economic growth.