China's industrial sector is deep in the red—and Xi Jinping isn't pulling the plug. As factory floors fill with workers hand-labeling baijiu bottles and EV makers like Dayun hobble through restructuring, the country is sitting on its largest wave of money-losing manufacturers since 2001. The problem isn't just about profit—it's political. Local officials, terrified of unrest, are flooding unviable firms with tax breaks and subsidies to keep people employed. At the same time, excess output is dragging down prices, fueling deflation, and triggering dumping tariffs across global markets.
Take Shanxi province: nearly 40% of its industrial firms reported losses last year. Yet manufacturers like Dayun, once a regional giant in trucks and now a struggling EV hopeful, still receive government perks—toll exemptions, tax credits, and sales to state-backed buyers. Why? Because failure isn't just a business issue anymore. It's a threat to social stability. Even as courts try to ramp up bankruptcy case throughput and central regulators warn against propping up “zombie” companies, few are actually allowed to die. Judges are held personally accountable for unrest, and that creates a massive disincentive to let firms collapse.
What's at stake? Market discipline, capital efficiency, and long-term growth. Beijing's dilemma is clear: allow inefficient firms to exit and risk job losses—or delay the reckoning and risk structural stagnation. Some insiders are pushing for reform—output quota systems, license-linked incentives, and tighter oversight on subsidies—but progress is slow. As one factory boss put it, “The government shows no real determination yet.” Investors watching China's next move should take note: this isn't just a domestic balancing act—it's a story with global spillover potential.
