China is about to exterminate zombie companies

On April 25, 2016, China's First Minister Li Ketiang , announced his determination to shut down zombie businesses. This new measure adopted by the government will restructure the Chinese economy. 

 

What do we mean by zombie businesses?

Well, rest assured that there is no link with the living dead. Forget the series the Walking Dead.

Actually, the zombie businesses are heavily indebted companies – state-owned firms – which are not able to pay back their banks because they are no longer able to generate enough income. Thus, when they borrow from banks, this is only for meet their debt payments. State-owned companies don't borrow on markets but from banks. As a result, when state-owned firms borrow money from banks, these can not grant credit to finance healthy firms. That's why, they are called “zombie” because they have the same principles of them. Indeed, they devour healthy companies by depriving them of loans.

China's economy

Today, China is the world's second largest economy. In 2015, the unemployment rate was 4.05 %. There are 800 million employees across China. Its main export partners are countries such as the United States, Hong Kong, Japan and South Korea. The country is exporting more goods than it is importing. It exports goods such as electrical and other machinery, apparel, textiles, iron and steel, optical and medical equipment, and industrial products. Moreover, China has a key role in international trade.

Let's kill the zombies before being devoured

After the 2008 financial crisis, China's growth has fallen. Nowadays, growth levelled off in China.

However, the forecasts are bleak. State-owned companies account for 20% of the country's riches. Moreover, this affects also the rest of the world. Thus, the government intends to reflate the Chinese economy.

In order to achieve this, the government wants to shut down zombie companies within 3 years. Actually, zombie companies are not profitable which 345 zombie firms in China . The industries that are affected are: glass, steal, coal, cement and non-ferrous metals. Most of the zombie companies are in provinces such as Hebei, Jilin, Jiangsu, Zhejiang, Anhui, Shandong, Henan, Hubei, Hunan and Guangdong. In December 2015, the Prime Minister, declared “For those zombie businesses, whith overcapacity, we must destroy them without pity”. Those zombie companies had tremendous negative impacts on China economy. They slacken the Chinese economy. After the 2008 financial crisis, the government had implemented a strategy which consisted in supporting these companies. Thus, those firms rely on the support of local authorities. However, as a result, companies have become 4 times deeper in debt.

The government desires to shut down zombie firms to redirect the loans towards the vibrant private sector. China and foreign investors are waiting for the reorganisation. The Chinese government can not disregard this problem. Li Kejiang stated that zombie firms will be reorganised, merge or will go bankrupt. Besides, in 2007, the Chinese government passed a law on bankruptcy. This law involves commercial companies in bankruptcy in order to facilitate liquidations. Besides, the government forced to the provinces to establish bankruptcy tribunals. It's a procedure to accelerate the judicial liquidation of zombie companies.

This measure will allow firms to be more competitive globally with a view to generating renewed growth.

The walking jobless

Nevertheless, what will be the consequences on society?

If the zombie companies were to close, around 5 million people could become unemployed. To address this issue, the government suggested state aid as compensation for unemployed people. The amount of aid in the approximate range of 14 billion euros. But, the local authorities did not agree with this measure. First, because they don't want unemployment figures go up in their respective provinces. Second, because they are afraid of popular discontent. Indeed, in recent times, with the development of inequality, there has been growing anger against the government among Chinese people.

 

It may be questioned if this measure will be effective in the future.

Océane B.