This paper examines how zombie firms shift their debt within the supply chain, following the 2015 supply-side structural reform in China. Findings reveal that zombie firms, particularly state-owned ones, are decreasing their reliance on bank loans while increasing the use of trade credit, effectively passing their debt to non-zombie firms in the supply chain. This debt shifting leads to higher unpaid invoices for suppliers in industries with a high proportion of zombie customers. This phenomenon cannot be explained by credit redistribution, but rather by the stronger negotiation power of zombie firms and the willingness of suppliers to share risk due to policy shocks. While the supply-side reform curtails ineffective “blood transfusions” from banks to zombie firms, it leads to an increase in the occupation of funds in the supply chain by zombie firms, thereby squeezing out investments from upstream efficient firms. These findings provide new insights into the impacts of zombie firms and the effects of the supply-side reform. It is suggested that the government should prevent zombie firms from shifting their debt to suppliers, thereby shielding healthy firms from harmful spillover effects.