Chinese authorities have started to crack down on zombie firms, firms that mostly exist in name. A good sign, writes financial analyst Sara Hsu in the Diplomat, but there might be huge differences between provinces, she warns, as the government also wants to avoid job losses.
Many SOEs in sectors that have reached overcapacity have committed to laying off workers, but some local governments have pledged to keep SOEs in overcapacity sectors alive in order to preserve jobs. This points to geographical differences in treating zombie firms. While regions like Xinjiang province have resolutely committed to ending overcapacity, other areas find this much harder to carry out due to the emphasis on maintaining employment and social stability. Indeed, zombie firms have strong ties to local economies, government, and the banking sector, rendering them particularly hard to kill.
Zombie firms may include both dormant firms and loss-making operational firms. Few provinces have released information about the number of zombie firms that exist within their borders. Shandong province, however, has identified its zombie firms, which numbered at 448 at the beginning of this year, and were situated in the textiles, building materials, machinery, chemical, coal, metallurgy, medicine, and electronics industries. Hunan province has noted that its enterprises that have reached overcapacity number at about 1,000, while Anhui province has estimated these at about 1,040. More developed provinces such as Guangdong, Tianjin and Shanghai are believed to have the highest numbers of zombie firms since SOEs have led the prior growth revolutions. However, much more pressure is being placed on provinces with large resource-based industries to reduce zombie firms. This is felt strongly in the northeast, in Hebei, Inner Mongolia, and Shanxi province.
China’s leadership has attempted to restructure the economy while shielding its citizenry from the pain of job losses and worse economic conditions. It seems likely that households will face less protection if zombie firms are to at last be laid to ground. The trick is to generate new jobs, new sources of growth, as the zombies are buried, and therein lies the never-ending challenge.
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