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Social stability over everything: China supports loss companies and the costs of political priorities

Published on: June 20, 2025 / Updated on: June 20, 2025 – Author: Konrad Wolfenstein

Social stability above all else: China supports loss-making companies and the costs of political priorities – Creative image: Xpert.Digital

China's Dilemma: Why Beijing Keeps Bankrupt Companies Artificially Alive

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The People's Republic of China faces a fundamental economic policy dilemma: To ensure social stability, the government systematically keeps unprofitable companies alive that would have been shut down long ago under normal market conditions. This policy of supporting struggling companies clearly demonstrates the priorities of the Chinese leadership – social stability takes precedence over economic efficiency.

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The extent of the problem of unprofitable companies

Dramatic increase in inefficient companies

The scale of the problem is underscored by recent data: The proportion of loss-making companies in China rose from 8 percent in 2023 to 13 percent in the first half of 2024. This development significantly exceeds the global trend, where the proportion increased from 4 to 6 percent during the same period. Particularly alarming is the fact that even excluding the real estate sector, the proportion rose from 7 to 11 percent.

Particularly affected sectors

The automotive industry exemplifies this trend. The proportion of loss-making industrial companies reached its highest level since 2001 in 2024. In Shanxi province, which is repositioning itself as a clean energy hub, almost 40 percent of industrial companies are operating at a loss – twice the national average.

The example of Daun Automobile in Shanxi illustrates the problem: despite a failed transition to premium electric cars and a court-ordered restructuring in 2024, the company continues to produce trucks. This demonstrates the reluctance of local authorities to allow market exits.

The mechanisms of state intervention

Comprehensive subsidy policy

The Chinese government employs a wide range of support measures. More than 99 percent of listed companies received direct state subsidies in 2022. This is particularly evident in the case of electric car manufacturer BYD, whose direct subsidies increased from €220 million in 2020 to €2.1 billion in 2022.

Government support includes not only direct subsidies, but also tax breaks, low-interest loans, discounted electricity rates, and subsidized building plots. From 2021 to 2023, the Chinese automotive industry received over €5.7 billion in direct subsidies.

Institutional obstacles to market consolidation

The Chinese insolvency system significantly hinders the necessary market correction. Courts are reluctant to approve closures because judges can be held liable for potential social unrest. A 2021 legal paper shows that courts are often required to defuse protests in advance before authorizing bankruptcies.

Social tensions despite low unemployment

Deceptive stability of labor market data

The officially low unemployment rate of 5.2 percent on average in 2024 conveys an impression of economic stability. However, this figure masks the real problems: Youth unemployment reached 18.8 percent in August 2024, rising from 17.1 percent in July. The unemployment rate for 25- to 29-year-olds was 6.9 percent.

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Increasing protests and social unrest

Despite government efforts to maintain stability, social tensions are rising. The China Dissent Monitor documented a total of 937 protest incidents in the third quarter of 2024, representing a 27 percent increase compared to the same period of the previous year. The majority of these protests were led by workers (41 percent), property owners (28 percent), and rural residents (12 percent).

Another sign of the government's concern is the suspension of wage data publication by the major recruitment platform 51.com, presumably to mask the weakness of the labor market.

Economic consequences of this support policy

Deflationary tendencies and weak domestic demand

Policies that artificially keep inefficient firms afloat contribute to deflationary tendencies. In November 2024, consumer prices rose by only 0.2 percent, while they actually fell by 0.6 percent compared to the previous month. Producer prices fell by 2.5 percent, reflecting the ongoing deflationary pressure in the manufacturing sector.

Domestic demand is stagnating, and consumer confidence is suffering from the collapse of the real estate sector. This weak domestic demand is increasing China's dependence on exports and leading to structural imbalances.

Overcapacities and trade conflicts

Subsidizing non-viable companies leads to massive overcapacities. Estimates suggest that overcapacities in electric vehicles and lithium batteries are large enough to double exports in these sectors. Even with an increase in production capacity utilization to 80 percent, exports of electric vehicles would have to increase by approximately 30 percent and those of lithium batteries by approximately 70 percent.

This overproduction is leading to international trade conflicts. In October 2024, the EU imposed tariffs of up to 35 percent on Chinese electric cars. The US raised import tariffs on Chinese goods to 125 percent, while China responded with retaliatory tariffs of 84 percent.

Expert opinions and reform proposals

Criticism of the lack of market discipline

Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings, criticizes the effects of the policies: “The lack of market discipline is detrimental to healthy companies.” Inefficient resource allocation hinders economic development and weakens competitiveness.

Structural reform proposals

The renowned economist David Li Daokui proposes a quota system in which companies can sell production rights to reduce overcapacity in a market-oriented manner. Such market-based mechanisms could represent an alternative to direct government intervention.

Michael Pettis, a finance professor at Peking University, emphasizes the global implications: “Policy measures to reduce job and revenue losses for companies may seem like a purely domestic problem, but since these policies lead to a faster increase in production than in the associated consumption, they are also effectively trade policies.”.

Historical perspective and current challenges

Differences from previous reforms

In the 1990s, Premier Zhu Rongji closed thousands of inefficient state-owned enterprises, which enabled China's subsequent manufacturing boom. Today, however, overcapacity is mainly concentrated in private companies, over which local governments have less direct control.

Xi Jinping's prioritization of national security and technological self-sufficiency leaves little room for market volatility. Local officials are primarily measured by growth and employment, which discourages them from closing unprofitable businesses.

Weak implementation of reform efforts

Although the State Council issued guidelines in 2023 to limit local subsidies and instructed banks to suspend loans to companies at risk of insolvency, implementation remains weak. This demonstrates the difficulty of enforcing central reform directives at the local level when they conflict with local interests.

An unsustainable balance

China's policy of artificially keeping unprofitable companies alive reveals a fundamental tension between short-term social stability and long-term economic health. The low unemployment rate is achieved at the cost of inefficient resource utilization and escalating trade tensions.

Without fundamental reforms, China risks stagnation that even the Communist Party cannot ignore. The government faces a difficult choice: either risk social unrest through necessary market corrections or continue sacrificing economic efficiency for short-term stability. The time for half-measures is running out, and the costs of such policies are becoming increasingly apparent for both China and the global economy.

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