Wu Guangqiang

    jw368@163.com

    “FOR those ‘zombie enterprises’ with absolute overcapacity, we must ruthlessly bring down the knife,” said Premier Li Keqiang at a meeting late last year.

    “Zombie enterprise” is an economic term coined by American economist Edward Kane in his 1978 research paper, referring to economically unviable businesses that are shored up by financial aid from the government and banks.

    At a State Council executive meeting in late 2015, Li defined zombie firms as those that fail to generate profits for three consecutive years.

    According to a recent study conducted by Renmin University of China, if a firm obtained a lower loan interest rate than the lowest rate in the market that year and in the previous year, it could be defined as a zombie enterprise.

    After analyzing a database, the study concluded that 7.5 percent of industrial enterprises fit the category from 2005 to 2013. In other words, there were about 27,000 zombie enterprises in China in 2013.

    The top five sectors with the most zombie enterprises are steel, real estate, architecture, business trading and conglomerates, while banking, media, nonbanking finance, Internet technology and entertainment are at the bottom of the list, according to the study.

    Most zombie companies are found in the developed, coastal provinces such as Shandong, Jiangsu, Zhejiang and Guangdong, while relatively fewer such companies exist in under-developed provinces in central and northwestern China.

    State-owned enterprises (SOEs) and collectively owned enterprises (COEs) accounted for the bulk of zombie companies while private and foreign enterprises see far fewer ones. It’s understandable given the fact that the latter face more barriers to bank loans than the former.

    The likelihood of becoming a zombie increases with the age of an enterprise. Of the companies 1 to 5 years old, only 3 percent are zombies while 23 percent of the ones over 30 years old are zombies.

    The following factors are considered by the study to be responsible for the emergence of zombie enterprises: first, local officials’ interference — they keep the dead “alive” simply for the sake of their own “performance record” or local employment rate; second, vicious competition between different parts of the country — governments hoped to support local businesses, many of which are performing poorly, to squeeze out outside competitors; third, the aftereffects of extensive stimulus programs between 2008 and 2009; fourth, the declining external demands for Chinese products; and fifth, discriminatory loan policies of banks that, under the pressure of local governments, keep transfusing “blood” to dying businesses.

    The proliferation of zombie enterprises will kill a nation’s economy like a cancerous disease. It’s widely believed that one of the major causes for Japan’s “lost 10 years” in the 1990s was the existence of the large number of zombie enterprises.

    Tolerance of zombie businesses will cause serious consequences: every ring of the economic chain will get hurt in a chain reaction. Large amounts of natural and social resources will be wasted on futile attempts to rescue them and eventually the banking system as well as the economy as a whole may end up as zombies.

    It’s a pressing task to curb the further increase of the numbers of zombie enterprises and decimate them. But it is by no means an easy one, as it involves tackling overcapacity and re-employing laid-off workers in large numbers.

    As planned, the steel production is to be reined in by 100 to 150 million tons — or around 13 percent of the total production capacity — over the next three to five years. Coal production is targeted for a 9 percent cut. Almost 2 million jobs could be shed.

    Obviously, unless addressed with extra prudence, the drastic measure could result in social unrest. Comprehensive measures are called for, including reduced government intervention in corporate affairs, better assessment systems for State-owned enterprises and stricter regulations on banks. It is also necessary to soak up excess capacities via multiple channels and encourage failing businesses to merge and reorganize, while accelerating SOE reform.

    The key to a successful solution of the problem is, as a rule, continuous reform.

    (The author is an English tutor and freelance writer.)