The biggest threat to China’s global champions is not Donald Trump

{"text":[[{"start":8.88,"text":"The writer is chief economist for Asia-Pacific at Natixis and senior research fellow at Bruegel"}],[{"start":16.82,"text":"In health, the distinction between good and bad cholesterol is deceptively simple. Both circulate through the same system, yet one builds resilience while the other quietly clogs the arteries. "}],[{"start":30.4,"text":"China’s corporate world works in much the same way. Its most competitive companies — which are winning global market share by, for example, dominating battery technology and pioneering electric vehicles — are not being strangled by US tariffs or EU policy. 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. "}],[{"start":59.84,"text":"The real threat to China’s corporate champions is not protectionism; it is bad cholesterol at home."}],[{"start":67.52000000000001,"text":"This framing would have seemed far-fetched a decade ago, when China’s biggest companies were largely state-owned enterprises, more interested in political patronage than profit margins. "}],[{"start":81.91000000000001,"text":"The transformation since has been remarkable. China’s most consequential global companies are now mostly private, technology-driven and fiercely innovative. "}],[{"start":94.45000000000002,"text":"BYD has overtaken Tesla in electric vehicle sales. CATL supplies battery cells to manufacturers across Europe and North America. Huawei continues to advance in semiconductors and telecoms infrastructure. "}],[{"start":110.83000000000001,"text":"These are not companies coasting on cheap labour and currency manipulation. They are genuine global competitors — China’s good cholesterol — forged in one of the world’s most brutally competitive domestic markets. The rise of Chinese private enterprise into the upper tier of global industry is one of the defining economic stories of our era."}],[{"start":null,"text":""}],[{"start":134.76000000000002,"text":"The external environment is undeniably growing more hostile. The first year of Donald Trump’s return as US president was dominated by a wave of tariffs and Chinese goods facing duties that seemed punitive even by the standards of his first term. "}],[{"start":150.96,"text":"Europe, previously more accommodating, is hardening its posture. The EU’s proposed Industrial Accelerator Act signals a continent that is less willing to absorb Chinese competition passively. "}],[{"start":165.3,"text":"As if this were not enough, Trump’s second year in office has moved the pressure from tariffs to the grabbing of resources, especially oil, and from threats to outright war. "}],[{"start":177.94,"text":"The escalating crisis around Iran is injecting fresh inflationary pressure into global supply chains, threatening energy markets and shipping routes alike. "}],[{"start":188.94,"text":"This is a huge problem for most multinational groups, but less so for Chinese ones. China operates in a stubbornly deflationary environment, which cushions it from the inflationary pressures that western competitors face. "}],[{"start":206.07999999999998,"text":"Beijing holds substantial strategic petroleum reserves and has energy security through Russia because of its longstanding support during Moscow’s invasion of Ukraine. It also has enough renewables and coal to cover demand. "}],[{"start":222.27999999999997,"text":"As major exporters, Chinese corporations are exposed to disruptions in global supply chains and higher costs for energy and resources, but China’s huge refinery capacity and expanded trading routes make this shock relatively more manageable than for other major exporters. All in all, while the external threats are real, Chinese companies seem more resilient than their international competitors."}],[{"start":253.15999999999997,"text":"The deeper danger lies closer to home because of a worrisome phenomenon: involution, or neijuan, where the quest to increase sales (ie market share) leads to diminishing returns. "}],[{"start":267.78999999999996,"text":"China’s domestic market is not merely competitive; it is pathologically so. Profit margins across its industries have been compressing for years, driven not just by weak consumer demand, although that is a major factor, but by a sheer excess of companies competing for the same shrinking pool of revenue. "}],[{"start":290.72999999999996,"text":"Think-tank Bruegel’s research into the dynamics of Chinese corporate profitability reveals an economy where profits are vanishing and not because of higher costs — wages are stagnant and electricity prices coming down — but simply because everybody is trying to catch the same consumer."}],[{"start":311.62999999999994,"text":"What makes this particularly corrosive is the nature of the competition. China’s global champions are not losing domestic margin to foreign rivals. They are losing it to less productive domestic peers, including the bad cholesterol companies that do not make enough revenue to even cover debt payments. "}],[{"start":null,"text":""}],[{"start":333.2099999999999,"text":"Such companies should, in principle, go bust and let the most productive ones, many of the global champions we all know, gain market share. "}],[{"start":343.7899999999999,"text":"Instead they still receive the support of local government through subsidies, procurement contracts or by banks extending their credit. This is by no means irrational because officials’ careers depend on keeping local employment figures presentable and pushing their companies to the national and, eventually, global arena. "}],[{"start":365.2899999999999,"text":"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. "}],[{"start":383.6299999999999,"text":"The first sign of this drain is apparent in plunging fixed asset investments in manufacturing, including by productive companies."}],[{"start":392.6699999999999,"text":"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. But the political economy works against reform. "}],[{"start":null,"text":""}],[{"start":408.2699999999999,"text":"In an era of rapid automation, allowing unproductive companies to fail risks accelerating an impending job crisis."}],[{"start":418.11999999999995,"text":"The result is a paradox at the heart of the Chinese economy. The companies best placed to compete globally, China’s good cholesterol, are being quietly undermined by the bad. "}],[{"start":431.5199999999999,"text":"Despite this, western policymakers cannot afford to lower their defences against China’s global champions because they have every intention of raising their international market share given that margins are higher there, notwithstanding the protectionist waves or even the disruptions in oil markets and supply chains. "}],[{"start":453.19999999999993,"text":"The biggest obstacle to Chinese corporate success is not Trump; it is the bad cholesterol at home."}],[{"start":469.4199999999999,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1775979443_5970.mp3"}