As China’s manufacturers flood the global market with cars, chips, and just about everything else, the country’s economic juggernaut seems unstoppable. Policy makers in the United States and elsewhere fret that this onslaught will overrun their own industries, destroy jobs, and leave them reliant on a rival for vital products. But a growing number of Chinese factories are failing to produce at least one crucial thing: a profit. According to the London-based research firm Capital Economics, the share of Chinese industrial firms that are losing money has doubled since 2018 to 30 percent this year.
Losses are piling up at Chinese firms even as exports surge. Local governments regularly prop up unprofitable enterprises to preserve employment and meet economic targets. This has had a perverse effect throughout the country. An economic program that was meant to make China stronger and more independent has in fact made it more vulnerable to the policies of other countries.
Profitability was never a top priority of the Chinese Communist Party. Economic planners have assumed that a large manufacturing base is essential to China’s national security, technological advancement, political stability, and global influence. China’s leaders therefore value the production, exports, and jobs that factories generate far more than any financial return on their investments. As a result, China’s economy has long been cluttered with “zombie” companies: effectively bankrupt firms that are kept alive by creditors.
[Michael Schuman: China is flatlining]
But as the economy has slumped in recent years, the strain on Chinese companies has increased and their finances have deteriorated. Total net profit at 5,400 Chinese companies listed on local stock exchanges fell for the third consecutive year in 2025, according to data from Nikkei Asia, a Japanese business news outlet. Excess factory capacity and weak domestic demand have created a brutal competition for shoppers, and the resulting price wars have narrowed profit margins.
In market-based economies, unprofitable companies either fold or reorganize. In China, however, the government tends to sustain uncompetitive companies. Major banks, controlled largely by the state, roll over loans for troubled enterprises that can’t pay. Government officials offer tax breaks, subsidies, and general support to reduce costs, stimulate sales, or engineer bailouts. In an analysis of subsidies received by industrial firms in major economies from 2005 to 2024, the Organization for Economic Cooperation and Development found that Chinese state support was as much as eight times larger than government assistance elsewhere.
This advantage serves Beijing’s agenda. China’s leader, Xi Jinping, has promoted manufacturing to expand China’s global power and make the country less reliant on foreign supplies. American CEOs, who are under constant pressure to increase shareholder value and post ever larger quarterly profits, have to compete with Chinese companies that can simply slash prices, grab market share, and not worry as much about the bottom line. “I don’t think Xi Jinping thinks in terms of profits. I don’t think he cares,” Mark Williams, the chief Asia economist at Capital Economics, told me. Instead, Xi knows that getting other countries hooked on Chinese supplies “gives China a huge amount of leverage.”
But profits do matter. Without them, companies have fewer resources to invest and grow; in China’s case, they become more reliant on the state for their survival, which has knock-on effects for everyone. Capital thrown away on unproductive businesses can’t be invested in profitable ventures. Banks forced to direct funds to loss-making enterprises have trouble making money themselves, which limits their ability to lend. These inefficiencies are contributing to a massive rise in the nation’s debt-to-GDP ratio in the nonfinancial sector, which has nearly doubled since 2010 and now exceeds 300 percent. By crowding the market with uncompetitive firms, China’s state-led economic policies make it harder for any company to turn a profit. This has resulted in an economy that is not quite collapsing, but is suffering a “prolonged decay,” according to Logan Wright, a partner at the research firm Rhodium Group.
The more money that Chinese companies lose, the more the government must spend to sustain its economic model. Policy makers no longer have a lot of cash to spare. Government revenues declined in 2025. Tax collectors, scrambling for funds, are cracking down on Chinese tycoons who hold their wealth outside the country.
Xi could reduce the strain on the economy and help Chinese companies by stimulating domestic demand for their products. But he continues to show no interest in introducing the politically sensitive reforms that could encourage more household spending, such as building a stronger social safety net. Facing an unstable job market and slumping property prices, Chinese consumers are reluctant to shop—car sales, for instance, in China have plunged by more than 20 percent so far this year.
These problems at home have forced Chinese manufacturers to search more desperately for profits abroad. China’s trade surplus is on track this year to break the 2025 record of $1.2 trillion. But exports are no panacea. Chinese automakers shipped nearly 80 percent more cars overseas in August than they did a year earlier, but their profits still sank by 16 percent. In theory, Chinese manufacturers that gain market share should also gain more power to raise prices and increase profits. But their greater reliance on foreign customers leaves them vulnerable to protectionism. If policy makers around the world impose tariffs or other barriers on Chinese goods, the pressure on China’s economy may be too much for Beijing to bear. The Chinese government has already been scaling back tax breaks that help electric-vehicle companies even as the industry’s profits suffer.
China’s leaders have largely managed to keep global markets open to its subsidized exports because most trading partners are wary of confronting Beijing. But as Chinese exports surge, Beijing is facing greater opposition to its predatory trade practices. The United States has already taken steps to protect its strategic industries, in part by slapping high tariffs on Chinese EV makers, effectively shutting them out of the American market. In a mostly contentious meeting of G20 finance ministers in September, a rare moment of amity involved a statement that criticized countries that rely too heavily on exports for growth—an implicit rebuke of China, which was the only member not to sign on. Even Russia, China’s supposed close friend, approved.
[Patrick George: The firewall against Chinese cars is cracking]
In a report published earlier this year called “The Chinese Steamroller,” the French government’s High Commission for Strategy and Planning asserted that China’s export surge “now threatens and directly affects the very core of Europe’s productive system.” Germany’s Volkswagen, undercut by Chinese automakers, announced in September that the company’s decade-long restructuring would include cuts to 100,000 jobs—double earlier plans. Europe’s ballooning trade deficit with China, which has more than doubled over the past decade, has recently motivated European Union officials to discuss new mechanisms to block Chinese imports.
Protectionism in Europe would be especially damaging to Chinese companies, which can tap European consumers with bigger spending power than in many other parts of the world. Beijing had initially threatened to retaliate against proposed trade barriers by targeting European businesses—but earlier this month, Chinese leaders unexpectedly blinked. To avoid tariffs, Beijing agreed to a cap on exports of hybrid cars to Europe—a plan that could halve the number of these cars entering the EU over the next four years. By making this relatively minor concession, China’s leaders likely hope to stave off a wider trade war that could inflict even more harm on the domestic economy.
Global trade is becoming a grudge match between a stretched but determined Beijing and its frustrated trading partners. At the moment, Xi still holds the upper hand: Advanced democracies, leaderless in the age of Donald Trump, have been slow to organize against his ambitions. But the struggles of Chinese companies—and their overreliance on foreign markets—undercut Xi’s leverage. How he navigates these negotiations and trade-offs will directly affect companies and consumers not only in China but around the world. At the moment, Xi seems set on ushering in an era of greater economic conflict in which everyone loses.