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

China's top market regulator is escalating its crackdown on debt-laden 'zombie companies' by rolling out a pilot program in seven economic hubs—Beijing, Hebei, Jiangsu, Zhejiang, Henan, Sichuan, and Guangdong. Under a revised Company Law, the State Administration for Market Regulation can now petition courts for compulsory liquidation of these unprofitable entities if they fail to voluntarily wind up. These firms are often propped up by government subsidies or bank loans, contributing to overcapacity and 'involution' (neijuan)—intense, low-quality competition that officials blame on local protectionism. The pilot aims to purge laggards and prioritize market efficiency.

However, analysts caution that the broader impact may be limited in the short term. Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, noted that while the program will likely be 'moderately effective for clearing smaller, dormant private firms,' many larger state-linked zombies will continue to receive support from local governments and banks. The initiative reflects Beijing's broader push to reform its economy by dismantling local protectionism and reducing reliance on subsidies that sustain unviable businesses. If successful, the pilot could set a precedent for national implementation, but significant challenges remain in enforcing exits for politically connected firms.