China’s Zombie Firms Everywhere! Tens of Trillions in Empty Shells, Financial Crisis Looms

Factory workers were on the job when they suddenly heard their boss had fled. They were still owed two months of wages. Stunned, they had no idea what to do. Workers gathered inside a factory after it shut down on October 21. A manager addressed the crowd. One user said factories of every kind were closing this year, leaving workers with nowhere to turn. The owner of Xunyi Xing Apparel disappeared on payday October 19. The factory is in Haosheng Industrial Park in Guangzhou. Large amounts of goods and equipment remained inside its workshops. These private companies shut down when they can no longer operate, yet some state-owned companies keep going for years despite losses, becoming known as zombie companies. In China, zombie companies generally mean businesses that can no longer sustain themselves. They've lost money for years and owe more than their assets are worth. They survive mainly on government subsidies or renewed bank loans. They used to be mostly local state-owned companies or traditional manufacturers with excess capacity, including state-run steel and cement plants. Now many companies in emerging industry backed by Chinese Communist Party policies such as EVs and solar power have also become zombies with help from local subsidies. Lists of these companies touch on highly sensitive financial risks, including bad loans, local government finances, jobs and social stability. Officials and financial institutions usually keep those lists confidential and rarely release them. Take Tonghua Steel Group for example. Founded in 1958, they were the largest integrated steelmaker in Jilin province. Outdated production capacity left it with years of heavy losses. Its debt once reached 10 billion yuan or 1.4 billion US dollars. Shouguang acquired it in 2019, resolving its debt crisis. Yet broader industry conditions have kept it struggling and operating with a low profile. It's a typical zombie company. A Tonghua steelworker posted a video describing how one month's wages are now paid over two months. Some payments are only a few dozen yuan. Payments of just 300 to 400 yuan are common. China's steel industry has faced a deep adjustment in 2016 as property investment falls, infrastructure spending slows, and supply and demand remain out of balance. Around 80% of steel companies face losses or sharply lowered profits. Most of those still operating have become zombie companies. Wen'an Steel in Wuhan, Hebei province, began fully shutting down its old plant in early 2026. The Qiannan Fertilizer Plant in Hebei province is another typical example of a zombie company, a business that is no longer financially viable but continues to exist. This is the Qiannan Fertilizer Plant in Hebei, which was once a thriving business. As you can see, the entire area is now in ruins. It's hard to imagine that this place once played an important role in China's industrialization. These abandoned factory buildings and machines are reminders of the hard work and achievements of that era. See that? Everything is locked up. The Tianan fertilizer plant was once a major state-owned enterprise. It began operations in 1972 and was converted into a privately owned company in 2002. By 2016, production had completely stopped. The company survived by selling off its assets. It had no operating revenue for years and could no longer repay its debts, including massive bank loans. With no hope of recovery, a court accepted its bankruptcy case in 2023. By 2026, the company had entered bankruptcy liquidation and restructuring proceedings. Demolition began in September. International reporting and newly disclosed reports from financial institutions over the past two years show a growing problem. Debt piled up by China's zombie companies is spreading beyond real estate and local government finances. It's becoming a broader financial crisis that is harder to resolve. French bank Natixis released its China Corporate Monitor 2026 report on September 29th. It defines zombie companies as those whose earnings before interest, taxes, depreciation, and amortization, or EBITDA, cannot cover interest payments. Their share in China rose to 12.5 percent in the first half of this year, nearly twice the global average of 6.5 percent. Before the COVID pandemic, the share was about 6 percent. The report describes it as a doubling in just two years. The report also found that zombie companies account for 54 percent of China's real estate sector. Among local state-owned companies long protected by local policies, including local government financing companies, the share is 16 percent. Officials have not released a list of zombie companies. Yet a wave of well-known businesses entering bankruptcy restructuring, liquidation, or forced closure offers a glimpse inside. Often, only when a company finally collapses do people discover it had been a zombie all along. Junhe Group, a private Shanghai company with business on the scale of 100 billion yuan, has fallen into financial crisis. Rumors say 24 local government financing companies are trapped in the fallout. Its owner, He Qi, and his family had already fled to Tokyo. The group's once-busy office building in Lujiazui, Shanghai, is now locked and all the lights are off. Junhe's business model kept steel and other bulk goods in place, while money and financial paper circulated back and forth. That made its books look impressive. Stronger numbers made banks and trust companies more willing to lend. They also opened doors to land, favorable policies, and official backing for investment projects. Local government financing companies needed strong financial statements to support bond sales and meet investment targets. Jun He approached them with cooperation plans, and the two sides quickly agreed. The financing companies thought they had found a bargain. They did not know that He Qi had begun moving family members to Tokyo in stages in the second half of 2022. He also moved core assets through layers of offshore entities. In February 2023, he traveled through Singapore to Tokyo and never return to China. By September 2026, court enforcement claims against Junhe Group and related entities totaled over 24 billion yuan. That included about 18 billion yuan owed to banks, trusts, and other financial creditors, with virtually no one willing to take it over. More than 5,000 rank-and-file employees have gone unpaid since the second half of 2024. More than 40 small and mid-sized suppliers are owed about 1.2 billion yuan. Construction stopped at all 17 Junhe Yungu industrial parks nationwide, and the sites have been sealed by courts one after another. Joint venture stakes involving 24 closely tied local government financing companies have been frozen in batches, leaving losses on their books that cannot be written off. The Nanhai District Court in Foshan, Guangdong Province, declared Foshan Guangjing Optoelectronics Technology bankrupt in July this year and closed its bankruptcy proceedings. The court said the company could not pay debts as they came due. Its assets could not cover its debts, and the administrator had finished distributing its bankruptcy assets. Founded in 2011, it operated for about 15 years. It had received official CCP honors, including recognition as a specialized and innovative enterprise in Guangdong. Once a well-known private automaker, Dayun Auto ran out of cash after branching into new energy passenger vehicles. Suppliers sought bankruptcy restructuring in late 2024. Court-supervised restructuring is still being carried out. Combined liabilities across 58 related companies have reached about 5.5 billion yuan. The company also faces serious wage arrears. LaGo, once hailed as a unicorn in online recruiting, hosted more than 20,000 companies at its peak and raised several rounds of funding. It entered bankruptcy review in April this year and formally began bankruptcy restructuring in May. The cosmetics industry is also seeing a wave of bankruptcies and liquidations. At least 20 related companies entered bankruptcy proceedings or compulsory liquidation in the first half of the year, nearly twice the number in the same period of 2024. After July, Junhua Weizhiqiu Cosmetics entered bankruptcy proceedings. Beijing Tongrentang Cosmetics also entered compulsory liquidation. Zombie companies are most concentrated in traditional heavy industry and businesses tied to real estate. Some affiliates or subsidiaries of Bohai Steel, Wuhan Iron and Steel, and other companies have been merged, restructured, or shut down after years of losses and heavy debt. One vlogger said everyone knows the economy is struggling. Companies selling cheap, low-quality products should leave the market, restructure through bankruptcy, or close for good. That would gradually help the market return to normal. Yet in China, the vlogger said, those zombie companies can still survive quite comfortably. Many of these companies may be pillars of their local economies. They do more than make products. They provide local jobs and may even serve as government sources of money. With a company, you can get funding. You can pledge assets to a bank and keep paying the bank too. Local governments are struggling. To get through their term or simply keep things going while they're in office, officials do everything they can to prevent these companies from going bankrupt or closing. So, barely functioning companies, inefficient companies, and companies selling at rock-bottom prices stay in the market. If you approach companies like these in many places, they will basically take your order even at a loss. They just want to survive. That is understandable. Yet, survival cannot last forever. Without money to upgrade, keep up with the industry, or fully comply with the rules, this leaves many companies that follow the rules, even relatively large ones, unable to hold on. cheap prices in China's market end up pushing better businesses out. Think about that. Those who understand the situation probably know what kind of companies I mean. We cannot make decisions for them. Yet, their existence really does hold back China's economy. I do not know how many there are. Some vloggers put the share at around 20%. Business professor Xie Qian of the University of South Carolina said the CCP keeps these companies from closing because it fears mass layoffs and a rise in unemployment nationwide. Restless young people without jobs would become the biggest threat to social stability. Adjunct Associate Professor of Business Chen Songxing at National Donghua University in Taiwan said China's corporate structure is dominated by state-owned companies, including those run by the central government. In practice, the CCP will not easily let them go through bankruptcy because that would embarrass the party. The result is that companies unable to survive on their own keep tying up financial resources. Chen said the CCP is keeping some state-owned companies alive through subsidies, financing extensions, and local borrowing. Yet that money may go toward borrowing new debt to repay old debt, rather than new economic activity. He said this could slow the wave of closures in the short term. Over time, it crowds out financing for healthy businesses and traps China's economy in a vicious cycle. Many major property developers, including Evergrande and Wanda, have already reached effective default and debt restructuring. Meanwhile, local government financing vehicles tied to real estate and their bond-related businesses rely heavily on bank extensions to keep operating. Financial markets are watching them as potential zombie companies. China's local government financing vehicles cannot repay their accumulated operating debts. This has led to many defaults on non-standard financing, much of it outside public view. By August 2026, financing vehicles nationwide had been involved as borrowers in 237 such defaults. These failures to pay have serious knock-on effects. Large local state-owned companies have begun delaying payments to private businesses downstream. Once healthy, small and mid-sized private companies cannot collect what they're owed. Their cash flow dries up, forcing them into zombie status as well. Ordinary investors are now beginning to bear the cost of this debt buildup. As effective defaults by zombie companies and local government financing vehicles increase, wealth management products issued by Chinese banks have repeatedly ended early or failed to pay out in the second half of 2026. Mid-year credit assessments for 2026 show widespread rating withdrawals and overdue commercial bills among weaker local government financing vehicles in Shanxi, Shandong, Yunnan, and other areas. To conceal bad loans, many banks spent the last several years allowing interest-only payments while delaying principal repayment. This barely postponed bankruptcy. It also left tens of billions of yuan in unproductive debt stuck on banks' books. Government institutions in China compiled annual reports from thousands of local government financing companies. They put total local interest-bearing debt at about 68 trillion yuan. Data released by the International Monetary Fund in early 2026 put the broader debt of China's local government financing vehicles at over 71 trillion yuan by the end of 2025. For more than 20 years, China's local governments used state-owned financing companies to borrow for infrastructure. Infrastructure pushed up land prices. Government sold land to repay debt, then borrowed again for new projects. That cycle broke down as the property market stalled in the last few years and land stopped selling. Only then, with enormous debts weighing on them, did CCP authorities become alarmed. Since 2025, CCP authorities have shifted how they define and deal with zombie companies. Earlier cleanups focused on heavy industries such as coal and steel. Over the last two years, the focus has moved to local government financing vehicles and shell companies facing compulsory liquidation under the new company law. In August 2025, authorities explicitly required all local government financing vehicles to fully exit that role and transform their businesses by the end of June 2027. In 2025 alone, 372 local government financing companies publicly announced business transformations and removal from financing vehicle lists. That means they no longer undertake government financing. Jiangsu, Shandong, and Zhejiang, all provinces with large numbers of these companies, recorded the most exits. Yet the official cleanup conceals the crisis and hidden problems behind it. Beneath the appearance of removing zombie companies, accumulated operating debts are worsening in less visible ways. A local government financing company can exit its old role, yet its huge accumulated debts do not disappear. As these financing tools are phased out, local government budgets, financial institutions, and the transformed local businesses will ultimately have to absorb that debt. China expert Yang Bo said the current system and economy leave these supposedly transformed financing companies unable to earn enough to repay their debts. The same applies to businesses upstream and downstream. To hide bad loans, local banks are forced to keep extending or renewing them. This binds local governments and banks even more tightly to those bad debts, creating new zombie companies and the risk of cascading financial failures. When the bonds and loans left by zombie companies can no longer generate enough interest income, financial institutions must forcibly liquidate wealth management products, shifting the risk directly onto the public. Bankruptcy brings another round of hardships for suppliers and employees. An economist identified as Mr. Lai said, we used to see bankruptcy as the market weeding out weaker companies. Now it looks more like passing the costs down the chain. Business owners have tied up their personal assets and keep gambling on survival until the last moment. By the time a company enters court proceedings, its assets have dwindled to nothing. Banks take the factory buildings pledged as collateral. Employees who worked there for decades and suppliers who paid up front to fill orders are left unable to recover 90% or more of what they're owed. China's economy has declined for nearly four years. Even rosy official figures can no longer hide it. Official figures show 150,353 industrial companies above the designated size were losing money nationwide at the end of August, 2026. They accounted for about 29% of all companies in that category. The cumulative number was up 1.1% from a year earlier. In some provinces and cities, the traditional sectors such as chemical fibers and light manufacturing, the share of loss-making companies remained between 27 and 38 percent. That means one in every three or four companies was losing money. The problem goes beyond traditional industries. Blind expansion in the green industries promoted as China's new three has also created a wave of technology sector zombie companies. The International Monetary Fund has long warned that China's heavy reliance on government-led debt-financed industrial investment has created excess supply in some industries. Taiwan expert Chen Songxing said that for some Chinese companies, keeping production going matters more than making money. As long as they maintain capacity and exports, they can keep receiving government subsidies. This distorts the industrial system. When their core businesses cannot generate enough profit, they turn to dumping goods at low prices to absorb excess capacity. Data from China's state administration for market regulation show that nearly 13,000 companies tied to EVs, solar power, and lithium batteries deregistered in the first half of 2026 alone. That included over 7,000 EV companies, up 4.6% from a year earlier, over 5,000 solar companies, up 8.3%, and 155 lithium battery companies, up 12.3%. Hualong Dongzhe New Energy, in business for 11 years, entered bankruptcy restructuring in 2026. Its 20-megawatt power plant assets were forcibly liquidated at low prices. A court also ordered Zhejiang Sanyueqing Solar, founded 10 years earlier, into bankruptcy liquidation after it failed to pay millions of yuan in court enforcement claims. Manufactories that received huge initial investments have also become zombie companies. Three industry giants, Longji Green Energy, Tongwei, and TCL Zhonghuan, had estimated combined losses of more than 10 billion yuan in the first half of the year. In 2024 and 2025, solar module prices fell below production costs. These mid-sized solar companies lost money whenever they operated. They struggled along on earlier bank loans before their financing finally collapsed in 2026. Suppliers and local banks were left with a fallout and unpaid loans. Forecasts by auto industry and non-state media analysts in 2026 put around 50 loss-making new energy automakers in China at risk of cutting operations or stopping production entirely. Domestic spending is weakening, price wars are intensifying, and purchase tax incentives and other policy support are being fully phased out this year. Their factories, accumulated debt, and unpaid supplier bills are becoming major troubled assets for local governments. The fallout has also reached cross-border capital markets over the last two years. Many affected companies had already lost any viable core business in mainland China. By October 2026, the Hong Kong Stock Exchange had delisted 36 companies this year. More than 80% had mainland Chinese backgrounds. Their mainland businesses had long owed more than their assets were worth. Their shares had been suspended for years, with no trading volume, leaving them as zombie shell companies. Professor Xie Tian said China's economy really cannot recover quickly. Business closures and rising unemployment will further squeeze spending. That will bring more closures and losses at other related companies, creating a true vicious cycle.