The share of Chinese industrial firms running at a loss has doubled since 2018 to 30% in 2025, according to estimates by London-based Capital Economics, even as China continues to flood global markets with cheap exports. The finding underscores a deepening structural contradiction at the heart of the world's second-largest economy: surging production volumes masking widespread financial deterioration.

Scale of the Losses

Total net profit at 5,400 Chinese companies listed on domestic stock exchanges fell for the third consecutive year in 2025, according to data cited by Nikkei Asia. Excess factory capacity and persistently weak domestic demand have triggered price wars across sectors, squeezing profit margins to the point where output is expanding even as earnings shrink. Critics argue this model is structurally unsustainable without continuous state intervention.

The 'Zombie Company' Problem

The phenomenon is not entirely new. As analyst Michael Schuman noted in an article on The Atlantic, China's economy has long harboured 'zombie companies' — enterprises that are effectively bankrupt yet remain operational because creditors keep rolling over loans. Local governments routinely prop up unprofitable factories to preserve employment and meet economic growth targets, prioritising political stability over financial returns.

Profitability, the article noted, has never been the top priority of the Chinese Communist Party. Economic planners have historically viewed a large manufacturing base as essential to national security, technological advancement, and global influence — objectives that outweigh conventional return-on-investment calculations.

State Subsidies Far Exceed Global Norms

The scale of government support keeping these firms alive is substantial. An analysis by the Organisation for Economic Cooperation and Development (OECD) covering subsidies to industrial firms in major economies from 2005 to 2024 found that Chinese state support was as much as eight times larger than government assistance in comparable economies. State-controlled banks roll over loans for troubled enterprises, while government officials provide tax breaks and direct subsidies to reduce operating costs.

Global Trade Implications

The paradox of rising exports alongside rising losses points to a deliberate strategy of volume over value — one that has drawn criticism from trading partners who argue it amounts to state-sponsored dumping. This comes amid already elevated trade tensions, with the United States, European Union, and India among those that have imposed or are considering additional tariffs on Chinese goods. Notably, the OECD data suggests the subsidy gap between China and the rest of the world has widened over the past two decades, not narrowed.

What Comes Next

Economists warn that unless domestic demand recovers meaningfully, the deflationary pressure generated by China's oversupplied factories will continue to export disinflation globally while deepening financial stress at home. With local government finances also under strain, the capacity to indefinitely sustain loss-making enterprises is reportedly being tested as never before.