China's 'zombie' firms weighing on economy

Despite thousands of such companies already being shut down, the problem remains difficult to eradicate

A textile factory in eastern China. Beijing is trying to erase unprofitable enterprises where it sees fit. AFP

China's "zombie" enterprises are impeding the country's economic transformation, said the country's biggest state aluminium producer, even though thousands of such unprofitable and indebted state-owned companies have been eliminated.

There are three difficulties when it comes to getting rid of zombie companies, the official Xinhua news agency said, citing Ge Honglin, chairman of Aluminium Corporation of China (Chinalco).

Local governments, financial institutions, stakeholders and suppliers are keeping zombie companies alive to protect their own interests, said Mr Ge, who is also a member of China's top political advisory body.

The land assets of such companies also lack value, and resettlement of workers is costly, he said.

China plans to eliminate thousands more zombie companies by 2020.

For years, such enterprises have survived on bank loans and local government backing, robbing more deserving companies of financial resources that could have otherwise contributed to local growth.

So far, China has disposed of more than 1,900 zombie companies and heavily indebted companies, the head of the state assets regulator said.

With the 2020 target looming, China says it will speed up the disposal. But that effort could be complicated by a slowing national economy and concerns about social unrest.

To ensure a smooth exit and to avoid unemployment and political instability in struggling regions, China's state planner in December ordered local governments to help broker deals between zombie companies and their creditors, and to draw up restructuring plans within six months.

The central government could set up a supervisory group to ensure that the disposal process is completed on schedule, Mr Ge said on Saturday during a session of the Chinese People's Political Consultative Conference.

The CPPCC and the National People's Congress, or parliament, were gathered in Beijing for their annual meetings to discuss economic and social concerns.

Beijing could allow local governments to issue off-budget bonds to finance acquisitions of land from zombie companies to expedite the process, Mr Ge said. Those special-bond issuances should not be included in local governments' debt assessment, he added.

The central government can also give out subsidies to support the resettlement of workers, while social insurance fees can also be reduced to lighten the burden of the companies, Mr Ge said.

In January, President Xi Jinping warned that China must be on guard against "grey rhino" events, or highly obvious yet ignored threats. Zombie companies would be properly resolved, Mr Xi said.