Overproduction and mounting losses have made China’s industrial model increasingly dependent on government support and foreign markets.
According to Atlas Diplomacy, an article titled “China’s Achilles’ Heel,” written by Michael Schuman and published in The Atlantic, examines how China’s expanding production capacity and exports, combined with weak domestic demand and extensive government support for loss-making enterprises, have reduced corporate profitability and increased the country’s vulnerability to foreign trade restrictions. The following is a summary of the article.
Despite the remarkable expansion of industrial production and growth in global exports, China’s economy faces a structural weakness: a growing number of the country’s factories and industrial companies are unable to generate profits. According to data from the research firm Capital Economics, the share of loss-making industrial companies in China has doubled since 2018, reaching approximately 30 percent in 2026. This trend demonstrates that increased production volumes and dominance of global markets do not necessarily translate into stronger corporate financial health or sustainable economic growth. In fact, a model designed to strengthen China’s industrial power and strategic autonomy has now intensified the country’s dependence on government support and foreign markets.
The Chinese Communist Party has consistently regarded the expansion of production capacity as essential to national security, technological advancement, political stability, and greater global influence. Consequently, the production of goods, preservation of employment, and expansion of exports have often taken precedence over corporate profitability. Local governments keep loss-making enterprises afloat to preserve jobs and meet economic targets, while predominantly state-owned banks roll over loans to companies unable to repay their debts. Tax exemptions, subsidies, and other forms of financial assistance also help these businesses remain operational. This approach prevents inefficient companies from exiting the market and intensifies price competition.
Weak domestic demand and excess factory capacity have placed additional pressure on the profits of Chinese companies. The combined net profits of 5,400 Chinese companies listed on domestic stock exchanges declined for the third consecutive year in 2025. Price wars to attract customers have squeezed corporate profit margins and reduced the resources available for investment and expansion. Meanwhile, increased financial support for inefficient companies diverts capital away from more productive activities and constrains banks’ ability to provide loans that generate adequate returns. China’s non-financial sector debt-to-GDP ratio has also nearly doubled since 2010, surpassing 300 percent. This trend is increasing the cost of sustaining the country’s current economic model.
One way to ease these pressures is to boost household consumption and strengthen domestic demand. However, the social reforms needed to achieve this goal, including the establishment of a stronger social safety net, continue to face political constraints. Job insecurity and falling property prices have weakened consumers’ willingness to spend. Car sales in China’s domestic market also fell by more than 20 percent in 2026 during the period under review. Under these circumstances, manufacturers have increasingly turned to exports to compensate for weakness in the domestic market. However, higher overseas sales do not guarantee greater profitability. For example, despite substantial growth in Chinese car exports, automakers’ profits declined in August.
Greater dependence on foreign markets makes China more vulnerable to trade protectionism. The United States has effectively restricted access to its market for Chinese electric vehicles by imposing steep tariffs on them. In Europe, concerns about competitive pressure on domestic industries, the widening trade deficit with China, and threats to employment have also intensified discussions about introducing new import barriers. Volkswagen’s announcement of plans to cut approximately 100,000 jobs in Germany illustrates the competitive pressure facing Europe’s traditional industries. Beijing has also agreed to limit exports of hybrid vehicles to Europe in an effort to prevent tensions from escalating. This concession is intended to reduce the likelihood of a broader trade war.
Overall, China continues to possess substantial industrial capacity and considerable influence in global trade. However, supporting production without sufficient attention to profitability, domestic demand, and the efficient allocation of capital has generated mounting costs. The more dependent companies become on government subsidies and foreign customers, the less capable China’s economy will be of withstanding trade shocks. Escalating tariffs and import restrictions could expose these weaknesses more clearly and increase pressure on both the government and businesses. The trade competition ahead will therefore test not only China’s export strength but also the sustainability of its industrial development model.
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