A lot has been written about the Chinese slowdown and whether the economy is bottoming out. An important part of the story is that China's corporate sector has taken a huge hit because of the slowdown.

Corporates are seeing declining orders, a build-up of inventories, and many bankruptcies, which is also driving the bearish sentiment on China, according to Societe Generale's Wei Yao.

So the bearish sentiment is being driven by the market's inability to accept lower growth and because the "burden of the economic slowdown is disproportionally greater on corporates".

Profits of large industrial companies shrank 2.4 percent year-over-year (YoY) in the first five months, compared to 23 percent yoy in Q4 2008. A significantly more important sign is that over half of the 760 companies listed in the domestic stock market experienced yoy declines in net profits when they reported semi-annual results, which was worse than in first half of 2009. And smaller companies have had it far worse.

Yao says most of this squeeze is coming from higher labor costs and government taxes. While resilient wage growth is a good thing, the rising taxes aren't.

The sum of value-added tax (VAT) and corporate income tax was up 10.7 percent YoY in the first quarter, and 13.6 percent YoY in the second quarter:

"The gap between profit growth and tax growth is now wider than ever. Tax is not living up to its role as a stabilizer, as it was designed to, but instead is adding to the economic pains for corporates."

Yao says the pressure is squarely on Beijing's shoulders to figure out whether it wants to use more investment and credit to target the immediate slowdown or focus on reforms to regain the confidence of corporates and the long-term prospects of the economy.

This chart from SocGen shows that tax revenues have been outpacing GDP growth: