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What is the deal with China's zombie companies?

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These companies have condemned the Asian giant's economic growth. Cumulative corporate debt could stop China

The Asian giant hoped to quickly surpass the United States as the world's largest economy. However, China is sunk in debt, mostly by state companies. The so-called zombie companies will make this plan take longer than expected.

As clarified by the BBC, the term 'zombie companies' is used to define deficit or insolvent entities that continue to operate only for the leniency of their creditors. This means that they remain 'alive' only thanks to the external aid they receive, both public and private. Without this, they would be considered dead due to the high level of illiquidity they suffer.

The term began to be used for the first time to describe the Japanese companies that were on the road to death after the economic crisis of 1990, as was the case of Toshiba.

According to Foreign Policy, in China's specific case, state companies are responsible for a quarter of the country's economy, since they have borrowed around 60% of the total corporate debt. As stated by McKinsey management consultancy firm, between 2007 and 2014, combined public and private companies went from $ 3.4 trillion to $ 12.5 trillion dollars.

Read also: A new chapter in the US war against Huawei

One of the most notorious cases is that of Erzhong, a state heavy machinery company that became a zombie one. Today, the company does not generate enough income to pay its debts and continues to stay alive due to the willingness of banks to continue issuing new loans.

Risks of the easy way

Therefore, returning to the first point, the high levels of indebtedness of the Asian giant are due in large part to the fact that these national companies have been financed by state banks at low costs, which led to excessive leverage.

In fact, according to the magazine Dinero, the 'zombies' bring with them even bigger problems, because the resources that are destined by the banks to save these companies have been taken away from viable companies with stable growth. So they end up sacrificing profitable ventures.

This has led to China's plunge into corporate indebtedness. According to Business Insider, the country's economic growth has been declining steadily. JP Morgan predicted that this would fall from 6.5% to 5.5% from 2021 to 2025 and up to 4.5% between 2026 and 2030.

This accumulation of debt by the Chinese state has been condemning its economic growth, which has made it increasingly difficult to complete its mission to surpass the United States. The country's corporate debt is among the highest in the world: almost 162% of the GDP. JP Morgan's economist, Haibin Zhu, clarifies that the country's debt is going to need serious and prolonged policies.

Currently, China seeks to motivate zombie companies that still maintain some business value to restructure and to find new strategic investors. This would eventually reduce debt.

In March of last year, according to the journal La Información, Chinese authorities assured that this debt was in a "constant decline" due to a reduction in expenses and an improvement in the competitiveness and efficiency of the market. This was achieved under several reforms in the sector in order to diversify its actions.

 

LatinAmerican Post | Valentina Moya

Translated from "¿Qué son las empresas zombi de China?

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