Despite rising exports, nearly one in three Chinese industrial companies is operating at a loss, raising questions about the sustainability of Beijing’s manufacturing-led growth strategy.
Beijing: China’s manufacturing and export strength has become a growing concern for economies around the world. Policymakers, particularly in the United States, fear that an influx of Chinese goods could undermine domestic industries, threaten jobs and increase reliance on China for critical products. Yet, beneath the country’s formidable industrial capacity, a troubling contradiction is emerging: many Chinese factories are producing and exporting more goods but struggling to turn that output into profits.
According to London-based research firm Capital Economics, the proportion of Chinese industrial companies operating at a loss has doubled since 2018, reaching 30 per cent this year. This means almost one in three industrial businesses is struggling to remain profitable, despite China’s continued strength in manufacturing and exports.
Rising exports, mounting financial pressure
For Chinese manufacturers, expanding exports has not necessarily translated into stronger financial performance. Intense competition, efforts to increase production and the pursuit of greater market share are putting pressure on profit margins. As companies compete to sell more goods, many are finding it increasingly difficult to generate adequate returns.
Local authorities have continued to provide financial assistance to loss-making businesses to protect jobs and meet economic growth targets. Such support enables companies to remain operational even when they might otherwise be forced to shut down under normal market conditions.
However, this approach carries significant risks. Policies intended to strengthen China’s industrial base and reduce its dependence on foreign suppliers could leave the economy increasingly exposed to decisions made by overseas governments. Higher tariffs and restrictions on Chinese imports could further squeeze manufacturers that depend heavily on foreign markets, compounding their existing financial difficulties.
Production and jobs take precedence over profits
China’s industrial strategy has long placed broader economic and strategic objectives alongside, and often ahead of, corporate profitability. The ruling Communist Party regards a large manufacturing base as essential to national security, technological advancement, political stability and international influence.
Consequently, maintaining industrial output, expanding exports and safeguarding employment have often taken precedence over the financial returns generated by individual businesses. This approach has helped China build an extensive manufacturing sector and establish itself as a major force in global trade. However, it has also allowed less efficient businesses to remain in operation for extended periods.
These firms are commonly described as ‘zombie companies’. They are businesses that struggle to meet their financial obligations but continue trading with the help of lenders, government assistance or other forms of financial support.
Although keeping such companies operational can protect jobs and sustain production in the short term, the longer-term consequences can be damaging. Capital, credit and other resources may remain tied up in inefficient enterprises rather than being directed towards more productive businesses. This can weaken competition, discourage innovation and make it harder for stronger companies to expand.
China’s manufacturing dominance faces a test
China’s enormous industrial capacity remains a major competitive advantage. Exports of cars, semiconductors and other manufactured goods have strengthened its presence in international markets. Yet, the growing disconnect between production volumes and profitability raises questions about the long-term sustainability of its manufacturing-led economic model.
Producing more goods does not necessarily create greater economic value if businesses cannot earn sufficient returns to cover their costs. If loss-making manufacturers continue to rely on government backing or financial assistance, the burden of sustaining the industrial sector could increase over time.
External pressures could make the situation more difficult. As trading partners introduce tariffs and other restrictions to protect their domestic industries, Chinese exporters may face reduced access to overseas markets and greater pressure on already narrow profit margins.
The challenge for Beijing is therefore not simply to maintain China’s position as a global manufacturing powerhouse, but to ensure that its industrial strength translates into sustainable profits, greater efficiency and healthier businesses. Without a shift towards more productive and financially viable growth, rising exports alone may prove insufficient to resolve the underlying weaknesses in China’s industrial economy.
