21 October 2016
As many as 10% of listed Chinese firms can be classified as zombie enterprises, according to some research.
As many as 10% of listed Chinese firms can be classified as zombie enterprises, according to some research.

Why China won’t find it easy to curb its zombie enterprises

Sometimes it takes years for the real impact to surface from a major economic policy.

At the height of the 2008-09 global financial turmoil, China’s 4 trillion yuan stimulus plan was considered as a savior of the nation’s economy.

But in recent years, we’ve come to know that most of the money went to waste as local governments built more redundant plants and added production lines that are not commercially viable.

This has led to a swelling number of zombie corporations that Beijing is now trying hard to get rid of but is finding that the task is not easy.

Zombie is a term that describes companies in severe difficulties and need bailouts to keep running and servicing their debts. Usually, there is a glut of their products and prices keep falling.

Some Chinese media are trying to put together a zombie map in order to identify the regions that are suffering most from overcapacity.

This is a difficult job, because not many local governments are willing to come clean, given the culture where “face” matters a lot.

It will take a lot of guts on the part of local administrations to reveal the skeletons in their closets. Naturally, there are very few who actually come forward.

Shandong, a region where the great Chinese philosopher Confucius came from and a province known for its people’s relatively no-nonsense attitude, is an exception.

The northeastern province, said it has about 450 zombie companies involved in a myriad of activities including textiles, machinery, chemicals and coal.

While the local government was brave, observers however believe that the actual number may be higher.

Hunan, the hometown of Mao Zedong, didn’t put a number on its zombie firms, but said that it aims to eliminate about 1,000 companies in industries suffering from overcapacity. That means the zombie population is, at the very minimum, a thousand.

Anhui in east China said it has more than 1,000 companies in very difficult situation, and that roughly a tenth of such firms are large enterprises.

Liaoning, a heavy industry hub in the northeastern China has about 800 companies that have few productive assets but lots of debt and big payrolls to take care of.

Hebei and Shanxi numbers are unclear but the former produces a quarter of China’s steel and the latter is a coal economy. Steel and coal are known to be the sectors burdened with the most excess capacity.

Coastal provinces have their share of the problem but those powerhouses are usually much ahead in economic transformation. New industries and new companies emerge fast to pick up the slack, something other parts of China can only envy.

According to some research, about 10 percent of listed firms in China can be deemed as Zombie entities.

While the government has declared a war on zombies, threatening to punish them buy charging premium utility prices and suspending financial support, there has actually not been much improvement on the ground.

Due to fears that any drastic steps could lead to public protests and affect social stability, many zombie firms are still getting subsidies from local authorities so that the companies can keep writing pay checks to their workers.

Premier Li Keqiang has pledged to take the bull by the horns, but the zombie bull is no ordinary bull. It will require a multi-year effort and a bit of back-and-forth to achieve any significant results.

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EJ Insight writer

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