China’s Fair Competition Review Takes Aim at Zombie Firms

Chinese scientists and policymakers have long grappled with the challenge of “zombie firms”—ailing companies that survive only through ongoing bank credit and government subsidies, draining resources from more productive sectors. A new study published in Economic Modelling by researchers Chao Bi and Jinghua Wang provides compelling evidence that China’s Fair Competition Review System (FCRS) is a powerful tool for curbing this phenomenon.

The analysis examines the impact of the FCRS, a policy framework implemented to prevent local governments from issuing preferential policies that distort market competition. By systematically reviewing administrative measures, the system reduces the ability of local officials to prop up inefficient state-owned or politically connected enterprises. The study finds that the introduction of the FCRS has led to a measurable reduction in the number and proportion of zombie firms across Chinese provinces, with the effect being particularly pronounced in regions with weaker legal environments and higher levels of government intervention.

This research underscores a critical shift in China’s economic governance: from a model that tolerated industrial overcapacity and soft budget constraints to one that prioritizes competitive neutrality and resource allocation efficiency. For global professionals monitoring China’s economic trajectory, the findings signal that institutional reforms aimed at marketization are gaining tangible traction, even amid broader macroeconomic headwinds. The study not only validates the FCRS as an effective regulatory instrument but also provides a replicable framework for other economies seeking to address the zombie firm problem through competition policy rather than direct industrial intervention.

Why it matters:
This study provides rigorous empirical evidence that China’s institutional competition reforms are delivering measurable economic benefits, offering a model for other nations grappling with industrial inefficiency and state-led market distortions.

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