Chart of the Week: The Walking Debt: Resolving China’s Zombies

IMF Blog, December 11, 2017

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Canonical URL: Chart of the Week: The Walking Debt: Resolving China’s Zombies

China’s “zombies” are non-viable firms that are highly indebted, incur persistent losses, and continue to operate with support from local governments or soft loans by banks—adding very little value to economic prospects.
IMF research indicates that resolving China’s zombie firms can boost productivity and long-term growth prospects.
Finding a way to resolve weak firms can generate gains of about 0.9 percentage points in long-term growth per year by phasing out implicit support and reallocating resources to more dynamic ventures.

Zombies persist despite persistent losses (over three years), lower returns, and inefficient operations.
About 30 percent of them remain zombies after five years.
Survival mechanisms:
- Implicit support on credit from banks and local governments (soft loans, implicit guarantees) with estimated interest payment costs below market lending rates.
- Government desire to boost growth encourages zombie firms to invest excessively, raising leverage and weakening debt-service ability in hopes of resurrecting profits.

Zombies overlap considerably with state-owned enterprises; together they account for a large share of corporate debt (about 6-11 percent of GDP) and contribute to much of the rise in debt, posing risks to financial stability.
Zombies hinder competition and crowd out more profitable, non-zombie firms’ investment by 2-8 percent.
The share of zombies in total corporate debt rose quickly by 4 percentage points of GDP during 2008-16, the highest level since 2009.
Progress reported:
- The government resolved about 20 percent of the identified central state-owned enterprises that were zombies last year by merging, divesting noncore business, and liquidation.
- Recent mergers took place among large state-owned enterprises in the power, steel, and shipping sectors.

Corporate governance reforms: divestment and change of management to improve firm viability.
Deleveraging measures: write off nonperforming debt and operationally restructure firms to facilitate liquidation of unprofitable firms.
Tighten budgets for zombies and state-owned enterprises by suspending implicit support on credit access and allowing greater corporate defaults.
Reform state-owned enterprises by hardening their budget constraints and opening up state-dominated services sectors.
- These reforms can lead to gains in output by almost half a percentage point in the long term.

Persistent losses defined as losses sustained over three years.
Survival rate: about 30 percent remain zombies after five years.
Potential long-term growth gain from resolving zombies: about 0.9 percentage points per year.
Share of corporate debt held by zombies and overlapping SOEs: about 6-11 percent of GDP.
Investment crowding-out effect on non-zombie firms: 2-8 percent.
Increase in share of zombies in total corporate debt: rose quickly by 4 percentage points of GDP during 2008-16.
Government action: resolved about 20 percent of identified central SOE zombies last year.
Long-term output gain from SOE reform and opening services: almost half a percentage point.

The Editors, December 11, 2017.

本周图表：债务威胁：清理中国的“僵尸企业”； IMF博客； 2017年11月2日
- 本周图表：债务威胁：清理中国的“僵尸企业”； IMF博客； 2017年11月2日 (Markdown version)
- 本周图表：债务威胁：清理中国的“僵尸企业”； IMF博客； 2017年11月2日 (PDF)
今週のグラフ ― ウォーキング・デット中国のゾンビ企業を処理する; IMF ブログ 2017年11月2日掲載
- 今週のグラフ ― ウォーキング・デット中国のゾンビ企業を処理する; IMF ブログ 2017年11月2日掲載 (Markdown version)
- 今週のグラフ ― ウォーキング・デット中国のゾンビ企業を処理する; IMF ブログ 2017年11月2日掲載 (PDF)