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Xinyi Wu

China’s top market regulator is intensifying its crackdown on debt-laden “zombie companies” – rolling out a pilot programme in seven economic hubs to facilitate the forced exit of unprofitable firms often propped up by government subsidies or bank loans.
The move signals a broadening of Beijing’s campaign against local protectionism and the low-quality vicious competition that officials say results in neijuan, or “involution”.
With a change to China’s Company Law, the State Administration for Market Regulation and relevant departments can now petition courts for the compulsory liquidation of these walking-dead entities if they fail to voluntarily wind up.
The pilot programme will initially focus on Beijing city and the provinces of Hebei, Jiangsu, Zhejiang, Henan, Sichuan and Guangdong, the regulator announced on Monday.
The initiative is a positive development, said Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at French investment bank Natixis.
“I expect it to be moderately effective for clearing smaller, dormant private firms in the pilot areas and improving market-exit mechanisms,” she said. “However, its broader impact on China’s zombie-company problem is likely to be limited in the short term, as many larger or state-linked zombies continue to be supported by local governments and banks.”
All of that excessive competition has driven down prices even without productivity gains, and the resulting “involution” has led to a ballooning share of zombie companies across the country, particularly in sectors supported by industrial policy and state financing.
Zombie companies accounted for more than 12 per cent of China’s listed firms in 2024 – nearly double the global proportion, and about twice its share six years prior, according to a January paper by European think tank Bruegel.
In the renewables sector – which has been heavily promoted by the state – nearly one in three was a zombie firm, the paper added.


Similarly, the Federal Reserve Bank of Dallas noted in December that the zombie share in Chinese manufacturing reached 11 per cent in 2024. The bank warned that this proportion was set to continue rising if falling prices and corporate losses persisted.
Beijing has been pushing to build a unified national market to better allocate resources, and authorities also launched a high-profile campaign against involution last year. Some results may be showing, with industrial profits rising in March by 15.8 per cent – a six-month high.
But it is still too early to tell if the recovery can be sustained, particularly as a protracted Middle East conflict adds fresh volatility to global markets.
Roadblocks to the market regulator’s pilot programme remain, said Garcia-Herrero, citing the sheer complexity and scale of intertwined debts in sectors such as property and manufacturing, alongside local protectionism intended to safeguard jobs and social stability.
Many zombie firms – especially in less-affluent provinces – are kept alive by local officials and company owners seeking to avoid triggering mass lay-offs in a labour market already strained by deflationary pressures and external uncertainties.
But accepting some economic pain may be necessary to truly address the accumulation of zombie companies, according to Garcia-Herrero.
“Without stronger credit discipline and willingness to let losses materialise, the problem may persist,” she said.
Urban unemployment in the world’s second-largest economy rose to 5.4 per cent in March, according to official data, with more than one in six young people aged 16–24, excluding students, jobless.


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Six provinces and the capital city test a forced-insolvency pilot to purge overcapacity and dismantle local protectionism, prioritising market efficiency


Six provinces and the capital city test a forced-insolvency pilot to purge overcapacity and dismantle local protectionism, prioritising market efficiency.


China targets ‘zombies’ with regulatory headshots to kill off subsidised laggards

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Six provinces and the capital city test a forced-insolvency pilot to purge overcapacity and dismantle local protectionism, prioritising market efficiency

Six provinces and the capital city test a forced-insolvency pilot to purge overcapacity and dismantle local protectionism, prioritising market efficiency