Claire Zhao

China’s factories are busy but not necessarily profitable. In the first eight months of 2025, industrial value-added rose 6.2% year-on-year, yet profits edged up just 0.9%. The wide gap between output and profitability reveals structural inefficiencies across China’s industrial sector, including persistent deflationary pressure, chronic oversupply, and stagnant productivity masked by volume growth. This misalignment threatens the sustainability of industrial recovery and undermines Beijing’s broader growth targets.

China’s economy has grown faster than expected this year, but growth in tax receipts has fallen behind. In response, Beijing is turning to tax reform as a cornerstone of fiscal stabilization, combining short-term measures to raise revenue from existing sources with longer-term efforts to standardize its tax regime.

For companies, this marks a shift from episodic policy shocks to institutionalized legal pressure, including conflicting compliance burdens, more discretionary enforcement, and increased uncertainty. Beijing, in turn, can use US firms’ regulatory exposure as a strategic lever to influence trade negotiations, shape corporate behavior, and advance longer-term industrial policy goals.

Amid rising deflation and falling profits across industries, Beijing is intensifying efforts to rein in “involution-style” competition, or cutthroat price wars that sacrifice product quality and distort market order. At a July 1 Central Financial and Economic Affairs Commission meeting, President Xi Jinping emphasized the need to curb disorderly price competition, improve product quality, and phase out outdated production capacity.

Under this system, duties are incurred only when goods enter China’s domestic market. However, to close tax loopholes and monitor specific “sensitive” goods, the new rules impose stricter requirements on the  storage, processing, and domestic sales of sensitive imports, while also narrowing the scope of goods impacted.