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

_IMF Blog, December 11, 2017_

## Source details

**Canonical URL:** [Chart of the Week: The Walking Debt: Resolving China’s Zombies](https://www.imf.org/en/blogs/articles/2017/12/11/chart-of-the-week-the-walking-debt-resolving-chinas-zombies)

## Other formats

- [Markdown version](/en/blogs/articles/2017/12/11/chart-of-the-week-the-walking-debt-resolving-chinas-zombies/index.md)
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## Bibliographic details
- Authors: The Editors
- Published: December 11, 2017

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### Overview
- 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.

### How zombies survive
- 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.

### Cleaning up zombies
- 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.

### Reforms and policy recommendations
- 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.

### Key statistics and findings
- 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.*

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## Content in this bundle

- **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)](/external/chinese/np/blog/2017/121117c.pdf.md){rel="alternate" type="text/markdown"}
  - [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)](/external/chinese/np/blog/2017/121117c.pdf){rel="external" type="application/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)](/external/japanese/np/blog/2017/110217j.pdf.md){rel="alternate" type="text/markdown"}
  - [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)](/external/japanese/np/blog/2017/110217j.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2017/11/BLOG-1024x600-Zombies-Ahead-DNY59-iStockbyGettyImages-171287037.jpg](https://www.imf.org/wp-content/uploads/2017/11/BLOG-1024x600-Zombies-Ahead-DNY59-iStockbyGettyImages-171287037.jpg)
- [paper](http://www.imf.org/en/Publications/WP/Issues/2017/11/27/Resolving-China-Zombies-Tackling-Debt-and-Raising-Productivity-45432)
- [https://www.imf.org/wp-content/uploads/2017/11/Walking-Debt.jpg](https://www.imf.org/wp-content/uploads/2017/11/Walking-Debt.jpg)
- [Improving Financial Stability in China](https://blogs.imf.org/2017/12/06/improving-financial-stability-in-china/)
- [IMF’s latest report on China’s economic assessment](http://www.imf.org/en/Publications/CR/Issues/2017/08/15/People-s-Republic-of-China-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-45170)
- [China’s outlook in six charts](https://www.imf.org/en/News/Articles/2017/08/09/NA081517-China-Economic-Outlook-in-Six-Charts)
- [Getting China’s ‘Trusted Sons’ Back into Shape](https://www.imf.org/en/News/Articles/2017/04/26/NA042717-Getting-Chinas-Trusted-Sons-Back-into-shape)

_Source: https://www.imf.org/en/blogs/articles/2017/12/11/chart-of-the-week-the-walking-debt-resolving-chinas-zombies_