The writer is chief economist for Asia Pacific at Natixis and senior research fellow at Bruegel
In healthcare, the distinction between good and bad cholesterol is deceptively simple. Both circulate through the same system, but one builds resilience while the other quietly clogs the arteries.
The Chinese business world works in much the same way. The most competitive companies – which are gaining global market share by dominating battery technology and developing breakthrough electric vehicles, for example – are not strangled by US tariffs or EU policies. However, they are being damaged from within by an underclass of less productive domestic rivals, kept alive by the generous and often misguided support of local governments.
The real threat to China’s corporate champions is not protectionism; it’s bad cholesterol at home.
This framework would have seemed far-fetched a decade ago, when China’s largest companies were largely state-owned, more interested in political patronage than profit margins.
The transformation since then has been remarkable. China’s most influential global companies are now largely private, technology-driven and highly innovative.
BYD has overtaken Tesla in electric vehicle sales. CATL supplies battery cells to manufacturers throughout Europe and North America. Huawei continues to make progress in semiconductors and telecom infrastructure.
These are not companies that rely on cheap labor and currency manipulation. They are truly global competitors – China’s good cholesterol – forged in one of the world’s most ruthlessly competitive domestic markets. The rise of Chinese private business to the top of global industry is one of the defining economic stories of our time.
Fast-growing companies in Asia and the Pacific
This article is part of the Asia Pacific High Growth Companies Special Report.
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The external environment is undeniably becoming more hostile. The first year of Donald Trump’s return as US president was dominated by a wave of tariffs and duties on Chinese goods that seemed punitive even by the standards of his first term.
Europe, previously more accommodating, is hardening its stance. The EU’s proposed Industrial Accelerator Act signals a continent less willing to passively absorb Chinese competition.
As if this were not enough, Trump’s second year in office has shifted the pressure from tariffs to resource grabs, especially oil, and from threats to outright war.
The escalating Iran crisis is injecting new inflationary pressures into global supply chains, threatening both energy markets and shipping lanes.
This is a huge problem for most multinational groups, but less so for Chinese ones. China operates in a persistently deflationary environment, which protects the country from the inflationary pressures faced by Western competitors.
Beijing has significant strategic oil reserves and energy security through Russia thanks to its long-term support during Moscow’s invasion of Ukraine. The country also has sufficient renewable energy sources and coal to meet demand.
As major exporters, Chinese companies are exposed to disruptions in global supply chains and higher energy and resource costs, but China’s vast refinery capacity and extensive trade routes make this shock relatively more manageable than for other major exporters. Although the external threats are real, Chinese companies appear overall more resilient than their international competitors.
The deeper danger lies closer to home because of a worrying phenomenon: involution neijuanwhere the quest to increase sales (i.e. market share) leads to diminishing returns.
The Chinese domestic market is not just competitive; pathologically it is so. Profit margins across industries have been shrinking for years, not only due to weak consumer demand, although that is a major factor, but also due to a vast glut of companies competing for the same shrinking revenue pool.
Think tank Bruegel’s research into the dynamics of Chinese companies’ profitability reveals an economy in which profits are disappearing and not because of higher costs – wages are stagnant and electricity prices are falling – but simply because everyone is trying to capture the same consumer.
What makes this particularly corrosive is the nature of the competition. China’s global champions are not losing their domestic margins to foreign rivals. They are losing out to less productive domestic peers, including the bad cholesterol companies that don’t generate enough revenue to even service their debts.
Such companies should basically go bankrupt and let the most productive companies, many of the world champions we all know, gain market share.
Instead, they continue to receive support from the local government through subsidies, procurement contracts or through banks that provide them with credit. This is by no means irrational, as the careers of public servants depend on keeping local employment figures representative and pushing their companies into the national and ultimately global arena.
And yet the compound effect of this rational behavior translates into the bad cholesterol of the Chinese economy, namely the loss of the pricing power and profitability that China’s best companies need to finance the next generation of innovation.
The first sign of this exodus is evident from the declining investments in fixed assets in the manufacturing sector, including by productive companies.
Senior policymakers want to curb local government subsidy practices, and there is a genuine, if cautious, effort to reduce overcapacity in several industries. But the political economy works against reforms.
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In an era of rapid automation, the failure of unproductive companies risks accelerating a looming jobs crisis.
The result is a paradox at the heart of China’s economy. The companies best placed to compete globally, China’s good cholesterol, are being quietly undermined by the bad.
Nevertheless, Western policymakers cannot afford to lower their defenses against the Chinese world champions as they plan to increase their international market share as margins are higher there, despite the protectionist waves or even the disruptions in oil markets and supply chains.
The biggest obstacle to Chinese business success is not Trump; it’s the bad cholesterol in the house.
