China’s manufacturing industry has plunged into its most severe losses since 2001, yet many poorly managed enterprises are unable to close down under the policy objectives of the Beijing authorities and must stay afloat. The reason being the fear of mass layoffs triggered by closures, potentially causing social unrest.
In recent years, under Xi Jinping’s “State-Owned Enterprises Advance, Private Enterprises Retreat” policies, a regression towards planned economy has led to economic growth collapse, with demand for many products already saturated. Coupled with the ongoing real estate crisis for years, consumers have become more frugal, leading to a decline in prices.
According to Bloomberg, China’s manufacturing industry is currently facing the most serious crisis since the reform and opening up era, with severe losses in enterprises resulting in significant pay cuts and layoffs.
Neil Thomas, a researcher at the China branch of the Asia Society Policy Institute, pointed out that for the top leaders of the Chinese Communist Party, unemployment is a more politically sensitive issue than economic growth.
Thomas believes that for the Chinese authorities, unemployed people protesting would not pose much loss to them, but it would lead to a greater risk of “political instability.” Hence, Chinese officials may prevent companies from closing down or downsizing.
There are signs indicating that unemployment and pay cuts have become sensitive topics: one of China’s largest online recruitment platforms, Zhaopin, quietly stopped providing wage data this year.
Recently, the US-China trade war has led to a significant reduction in Chinese exports to the US, endangering millions of jobs in China, making the employment situation even more dire.
Mass unemployment has created an atmosphere of unrest, with protests in the fourth quarter of 2024 growing 41% compared to the same period in 2023.
Of the over 3,000 courts across China, only about 100 specialize in handling bankruptcy cases. Even when many companies on the verge of bankruptcy want to exit the market, they are unable to do so.
Wu Jian, a senior partner at the Beijing Zhong Lun Law Firm specializing in bankruptcy cases, mentioned that convincing the courts to accept cases is often the first challenge, as once the case enters the trial process, judges have to bear personal responsibility for maintaining social order.
For sensitive cases, court officials must visit the homes of protesters and petitioners to address complaints. If they fail to prevent protest events, especially if they occur on sensitive dates or holidays, court officials may face severe penalties such as demotion.
It is indeed difficult for companies on the mainland to close down. Take the Shangxi Qinyang Changsheng Brewing Company as an example. This company, employing 300 workers, adopts a low-efficiency production model with manual labeling and has been unprofitable since 2020 but has not shut down. Such instances are common across China, with business owners and local officials doing everything possible to preserve jobs and keep struggling companies afloat.
“If we shut down, workers will lose income and won’t receive their pensions,” said Megan Xiao, the daughter of the chairman and in charge of company marketing. “Closing the factory would bring huge social problems to our region.”
Another example is Shanxi Dayun Automobile. The automobile company once provided thousands of high-paying jobs in Yuncheng, Shanxi, but following the Chinese Communist Party’s economic policies, it shifted to advanced manufacturing, producing electric vehicles, resulting in a sharp decline in operations.
According to data from the consulting firm Alixpartners, China has 137 electric vehicle brands, with only 19 brands projected to be profitable by 2030. In November 2024, suppliers sued Dayun Automobile for non-payment, and the company initiated a restructuring due to cash flow difficulties.
However, Dayun still did not close down.
Political commentator Li Linyi believes that some Chinese companies should have closed down for various reasons. Due to stability concerns, the CCP fears the impact on its regime and forcefully supports these companies to continue operating, leading to what is known as “zombie companies.” The CCP cannot sustain rescuing these types of companies. Once these companies increase substantially, they will suppress the investment scale of normal enterprises, resulting in insufficient investment. Moreover, these companies usually rely on continuous bank loans for survival, occupying loan resources of other enterprises.
Li Linyi believes that although the CCP can temporarily keep these companies from closing down, the Chinese economy is barely running, which could potentially lead to bigger issues in the future.
(Adapted from Bloomberg reports)