The Dual Nature of China's Corporate Landscape: Good and Bad Cholesterol

China's corporate environment is increasingly characterized by a dichotomy between its most competitive companies, which are thriving on the global stage, and a multitude of less productive domestic rivals that threaten their profitability. This situation, likened to the distinction between good and bad cholesterol, highlights the internal challenges faced by China's leading firms as they navigate a fiercely competitive domestic market.

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Over the past decade, China's corporate landscape has transformed significantly. Once dominated by state-owned enterprises focused on political patronage, the rise of private, technology-driven companies has marked a new era. Firms such as BYD, which has surpassed Tesla in electric vehicle sales, and CATL, a key supplier of battery cells, exemplify this shift. These companies are not merely benefiting from cheap labor; they are genuine global competitors, often referred to as China's "good cholesterol."

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Despite their global success, these leading companies face a critical threat from within. The phenomenon known as involution, or neijuan, describes a situation where excessive competition leads to diminishing returns. As numerous companies vie for a limited consumer base, profit margins are eroding. Research from the think-tank Bruegel indicates that this decline in profitability is not due to rising costs but rather the overwhelming number of firms competing for the same market share. Less productive companies, often supported by local government subsidies, exacerbate this issue by remaining operational despite failing to cover their debts.

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Chinese policymakers are aware of the detrimental effects of these practices and are tentatively pushing for reforms to curtail local government subsidies and reduce overcapacity in various industries. However, the political economy complicates these efforts, as local officials prioritize employment figures and economic stability over the necessary market corrections.

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Critics argue that the continued support for unproductive companies undermines the very champions that could drive China's economic future. The paradox lies in the fact that while the most competitive firms are positioned to succeed globally, they are simultaneously hindered by the existence of less efficient domestic rivals. This situation raises concerns about the long-term sustainability of China's economic model.

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As the global landscape becomes increasingly hostile, with rising protectionism and geopolitical tensions, the resilience of Chinese companies will be tested. The ongoing challenge will be to balance the need for innovation and competitiveness with the realities of a domestic market plagued by inefficiencies. The outcome of this internal struggle will significantly influence China's position in the global economy.

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• “The biggest obstacle to Chinese corporate success is not Trump; it is the bad cholesterol at home.” — Chief Economist for Asia-Pacific at Natixis

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• “And yet, the compound effect of this rational behaviour translates into the bad cholesterol of the Chinese economy, namely the drain of the pricing power and profitability that China’s best companies need to fund the next generation of innovation.” — Economic Analyst

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• “Senior policymakers wish to curtail the subsidy practices of local governments, and there is a genuine, if tentative, push towards reducing overcapacity in several industries.” — Economic Policy Statement

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In conclusion, while China's leading companies are making significant strides on the global stage, the internal dynamics of its corporate environment present a complex challenge that could hinder their future growth and innovation.

Financial Times