To avoid losing millions of jobs and potential social unrest, China has no choice but to allow a large number of zombie firms to hang on to life.
In a recent report, David Lipton, first deputy managing director of the International Monetary Fund, said corporate debt in China has reached 1.45 times the country’s gross domestic product.
The IMF estimated that 55 percent of that debt is owed by state-owned enterprises, which contribute only 22 percent of GDP.
This shows that the risks SOEs present are out of proportion to their contribution.
A plan Beijing unveiled earlier this year to have banks convert some of their loans to zombie firms into equity may not be a good solution.
The IMF said it could backfire by prolonging the life of zombie firms — heavily indebted and loss-making companies dependent on the state to survive.
It seems China’s top leaders are increasingly aware of the danger of continuing to let zombie firms suck out the blood and vitality from the economy.
Beijing is sensing the need to change its mind and adjust its policy on zombie firms, Zoe Lam wrote in a Hong Kong Economic Journal column.
So as not to let zombie firms bring the entire country to its knees, Lam wrote that the central government will save only those that are of strategic importance.
For investors, the implication of such a policy is that credit defaults could become more rampant.
While these may be necessary, initial shocks are inevitable.
The confidence of overseas investors will be further eroded, and it will become more costly for mainland firms to borrow, Lam said.
Is Hong Kong immune to these problems?
Lam warned that given the high level of the city’s integration with the mainland economy, Hongkongers should not underestimate the contagion effect.
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