• The role of the Chinese government in shaping competition is essential to understanding why industries in China vary so significantly.
• In some industries, the government has a light-touch and competition is market-based.
• In contrast, other industries are shaped by Beijing’s industrial policies or are walled off from private competition.
• Beijing’s reluctance to allow industries to be consolidated by private firms is a major drag on economic growth.

Prevailing Winds is a China-focused blog written by Nicholas Borst, Director of China Research at Seafarer. The blog tracks the economic and financial developments shaping the world’s largest emerging market.

There is a long-running debate about the nature of competition in China. Some observers argue that China lacks a true private sector and that all industries are heavily shaped by the state. Yet a quick look across the economy reveals stark differences among industries. Some sectors are highly competitive and dynamic, with dozens of private companies jockeying for market share, while others are dominated by a handful of stagnant state-owned enterprises (SOEs). What explains these sharp differences among industries?

At the heart of this question is the role of the Chinese government in shaping competition. In some industries, competition emerges organically as firms seek market share and profits (naturally forming). In others, competition has been deliberately cultivated through industrial policy and planning (policy-induced). Finally, there are industries in which competition is largely an illusion because they are dominated by tightly controlled state oligopolies (state-controlled).

Data Note: The data in this piece draw upon the corporate ownership classification approach outlined in What’s Wrong with Chinese Corporate Profits?. It is based on a large dataset of more than 2,000 listed Chinese companies that spans over a decade. However, despite this dataset’s breadth and historical reach, its explanatory power is constrained in that it does not include unlisted firms. As such, it cannot fully account for competitive conditions in industries populated with a large portion of unlisted companies.

Each of these categories represents a distinct “model of competition.” Understanding these models is critical for identifying the fundamental drivers of an industry and assessing its likely trajectory. Let us take a closer look at what characterizes each of these competitive models:

Naturally Forming Model of Competition

China has a variety of industries characterized by companies engaging in market-based competition for profits and market share. The defining factor of these industries is that competition arises through natural market dynamics and with little state involvement. Private companies usually dominate these sectors. If state firms exist, they are often losing market share as more efficient private competitors replace them. Examples of these industries include consumer electronics, e-commerce, delivery services, and textiles and apparel.

There are several factors that allow the private sector to play such a large role. First, Beijing typically views these industries as low-value or non-strategic. As a result, they are less likely to be subject to government intervention or targeted by industrial planning.

Secondly, these industries have relatively low barriers to entry, enabling firms to enter and compete with ease. They are often accessible because they are not capital intensive, which reduces entry costs, and are not politically sensitive, so they do not require approval from Beijing.

Third, consolidation of these industries occurs without much direct government interference. At the outset, these industries can be brutally competitive environments, with companies often experiencing razor-thin margins and commoditized products. The firms that prevail in this competitive environment can consolidate the industry and emerge with stronger margins and profitability.

Out of this intense competitive environment, occasionally firms grow to the point where they can compete globally, expanding into overseas markets and developing their own brands.

The textile and clothing industry in China is a good example of a naturally forming model of competition. During the period from 2012–2024, China had 28 listed companies in this industry group. Of those, 24 were private companies. As shown in Figures 1 and 2, these private companies commanded the vast majority of both revenues and profits in the industry. Among those private companies, several have emerged as global competitors, including Anta, Li Ning, and Xtep. Other companies, such as Shenzhou International, have emerged as top suppliers to premier global brands such as Nike and Adidas.

Source: Wind Information

Source: Wind Information

Figure 3 shows that the net profit margin for the private firms in the industry is substantially higher than state firms, a testament to their greater efficiency and competitiveness.

Source: Wind Information

Policy-Induced Model of Competition

A second category of industries is characterized by competition that arises in response to government policy. While competition in these sectors can also be intense, it is fundamentally shaped by state-led efforts to promote and develop the industry. Beijing’s industrial policies target industries to accelerate technological advancement, build domestic capacity, or achieve strategic goals. Notable examples of such industries include automotives, semiconductors, solar panels, medical devices, and robotics.

Guided by Beijing, state banks and local governments flood the industry with capital, subsidies, and other forms of support. The availability of capital and resources can help overcome barriers to entry in industries with high capital intensity. This can lead to a large increase in the number of firms, both private and state-owned, in an industry. As a result, these industries can develop in amazingly short periods of time.

This rush of new entrants, however, can create significant problems, most notably in the form of excess investment. Cheap credit and policy-driven investment can result in overcapacity, with too many firms producing more than what demand can reasonably sustain.

When subsidies ebb or policy priorities shift, industry consolidation usually follows. Reductions in the availability of cheap credit, subsidies, or other forms of government support bring about a financial reckoning for uncompetitive firms.

If consolidation occurs without excessive interference by the government, competitive firms will take over the industry. Having achieved the scale and efficiency necessary to survive without government support, these firms may be poised to export and compete internationally.

However, market-based consolidation is not a certainty. Often, the government seeks to guide this consolidation process according to its own priorities, such as ensuring that favored firms survive the consolidation.

The auto industry is a notable example of the policy-induced model of competition. Historically, China’s auto industry was dominated by state firms who often worked with large global automakers via joint ventures. In the 2010s, the government rolled out significant industrial policies targeting the development of the electric vehicle industry. This led to a rush of new private entrants to the industry, such as NIO, Xpeng, and Li Auto. Other private companies already in the industry, such as BYD and Geely, grew their revenues substantially.

In the period between 2012 and 2024, China had 53 listed private companies in the automobile and components industrial group, compared to 20 state firms. As shown in Figures 4 and 5, these state firms dominated auto industry revenues and profits until very recently. This shift has been driven by the success of private electric vehicle manufacturers, such as BYD, that have now surpassed state conglomerates, like SAIC Motor Corp, in total revenues.

Source: Wind Information

Source: Wind Information

As shown in Figure 6, net profit margins for private automakers initially dipped as they made investments in new technologies and then subsequently rebounded as they captured market share from state firms.

Source: Wind Information

China’s auto industry is now struggling with significant overcapacity and cutthroat competition. As the subsidies that powered rapid growth disappear, automakers are scrambling to stay afloat. Meanwhile, regulators and industry groups have criticized automakers for selling cars below cost and postponing payments to suppliers. For its part, Beijing has signaled concern about the consolidation of the industry, exploring mergers between state-owned automakers and warning private competitors against engaging what it calls destructive price wars. It remains an open question if China’s innovative private automobile companies will be permitted to displace weaker state-owned competitors.

State-Controlled Model of Competition

The final model of competition in China is state controlled. The defining feature of these industries is that competition predominantly occurs between state-owned enterprises and is generally quite limited. Examples of these industries include banking, energy, and telecommunications.

Often, these industries are highly capital-intensive or operate under stringent state regulations. Beijing views these industries as politically sensitive or crucial to the economy’s core functions. Controlling the flow of new entrants into the sector is key to managing competition, as only approved companies – typically state-owned or state-connected – are allowed to compete for market share.

Within these sectors, multiple SOEs may compete against each other. The level of competition, however, is limited because the state firms lack incentive to truly compete with each other.

Additionally, government support means that underperforming companies are not forced to exit the market. Instead of allowing firms in these industries to go bankrupt, Beijing is likely to mandate mergers between state-owned firms to form even larger entities.

Firms operating in these industries are not generally competitive on a global scale, although they may expand internationally at Beijing’s direction, such as the global expansion of the Chinese banks.

Telecommunication services is a classic example of an industry where competition is state controlled. This sector is dominated by a few large state-owned firms, with private and mixed-ownership firms essentially nonexistent. China’s accession to the World Trade Organization (WTO) technically allowed foreign and private firms to enter the telecom industry, but thus far none have managed to do so at scale.¹

While the Chinese government has created a superficial competition among existing state companies, the telecoms industry remains far from dynamic. As shown in Figures 7 and 8, revenues and profits in the industry have grown sluggishly. Moreover, the market distribution of revenues and profits between the three largest firms, China Mobile, China Telecom, and China Unicom, has barely changed over the decade.²

Source: Wind Information

Source: Wind Information

As shown in Figure 9, net profit margins for the state firms have held steady due to the carefully managed competition.

Source: Wind Information

Deciphering Competition

With these models in mind, we can better understand the complexities around competition within the Chinese economy. Industries range from genuinely competitive to competitive in name only. The clues for deciphering which model of competition applies to an industry are listed in Figure 10.

Between naturally forming and policy-induced competition, the Chinese economy is replete with competitive industries. However, competitive dynamics in these industries are materially different. One is defined by the market-based competition seen in economies across the world while the other is shaped by Beijing’s formidable industrial planning.

To understand the potential of firms operating in industries defined by policy-induced competition, we must look closely at how consolidation occurs. The ability of efficient and competitive private companies to consolidate industries has been a major driver of China’s economic growth. For example, China’s manufacturing sector, amongst the most competitive in the world, is dominated by private firms who gradually displaced state enterprises. In naturally formed competitive industries, this process is driven by market dynamics with the most competitive firms prevailing.

In industries where competition is policy-induced, consolidation can play out much differently. In practice, Beijing often rejects market-driven consolidation in these sectors in favor of promoting chosen firms and state-owned enterprises. This reluctance to allow private companies to consolidate strategic industries has been a major headwind for the Chinese economy over the past decade. Beijing’s desire to shape outcomes in these industries prevents them from reaching their full potential and undermines the effectiveness of its own industrial policies.

The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

As of March 31, 2025, the Seafarer Funds did not own shares in the securities referenced in this commentary.

1. Kanungo, Anil Kumar. “China’s Telecommunications Services Sector: Implications for World Economy.” Association of Cambridge Studies, 2015.
2. Source: Wind Information.