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China Reform Monitor - No. 1240

Beijing forcing "zombie firms

Edited by Joshua Eisenman
September 2, 2016

August 1:

report released last month by the National Academy of Development and Strategy at Renmin University, found that 51 percent of steel mills, 45 percent of real estate developers, and 32 percent of construction firms qualified as "zombie" firms. The report, covering more than 800,000 industrial firms, defined zombie companies as those that received cheap financing but still ran at a loss, or did not generate enough profit to cover their interest payments. Based on that definition, in 2013 at least 7.5 percent of Chinese firms qualified as "zombies." Such firms were generally state-owned, received subsidies and had large amounts of redundant labor. The percentage of zombie firms fell after the year 2000, but many reemerged after 2008, when China spent 4 trillion yuan to counter the effects of the global recession. The report called on local governments to stop intervening in the operations of banks and markets and implement a stronger social safety net instead of relying on SOEs to fill social gaps. 
August 4:

At a meeting in Xinjiang on August 4, China, Tajikistan, Afghanistan, and Pakistan established the Quadrilateral Cooperation and Coordination Mechanism (QCCM) to coordinate their efforts to fight terrorism. According to a joint statement 
published by China’s official PLA Daily the "quadrilateral mechanism” covers a range of areas including "study and judgment of counter terrorism situation, confirmation of clues, intelligence sharing, anti-terrorist capability building, joint anti-terrorist training and personnel training.” 

August 12:

The Supreme People's Court has ordered lower courts to set up bankruptcy tribunals to clean up "zombie” companies, 
the South China Morning Post (SCMP) reports. Beijing, Shanghai, Tianjin, and Chongqing will be first to establish the liquidation tribunals, followed by major cities, including the capitals of 11 provinces – Hebei, Jilin, Jiangsu, Zhejiang, Anhui, Shandong, Henan, Hubei, Hunan, Guangdong, and Sichuan. "A bankruptcy trial is one of the major means to improve the corporate exit mechanism in retiring obsolete production capacity and in the winding up of zombie enterprises," an unnamed court official said. Previously, there were no such designated courts, said Zhu Xiaosu, at Watson & Band Law Offices: "We see the tribunals as progress on the legal front to beef up the exit channels for companies. We used to encounter reluctance, partly due to a shortage of manpower or lack of experience or dedication, from local judges in handling bankruptcy or liquidation cases." 

August 16: 

Authorities have apprehended 450 suspects connected to 158 cases of money laundering involving 192 underground banks and nearly 200 billion yuan ($30 billion). The crackdown, which was conducted jointly by the Ministry of Public Security, the People's Bank of China, and the State Administration of Foreign Exchange, focused on cross-regional and cross-border underground banks, and those who transfer money from corruption and other crimes. "Crimes committed by underground banks are still rampant,” the official Xinhua news agency reports. "Underground banks in different regions have increasingly colluded with one another, with crimes spreading to more places and committed in more covert ways. [They] have become channels for transferring illicit money obtained through all sorts of illegal activity, including public funds embezzled by corrupted officials.” 

August 17:

The political dispute between President Xi Jinping and Premier Li Keqiang is producing public disagreements among ministries over economic policy, 
SCMP reports
. After the release of weak July credit data, the National Development and Reform Commission (NDRC) accused the People’s Bank of China (PBOC) of creating too much liquidity and channeling too little into real economic activity. The central bank defended itself, insisting that it had done enough, and called on the Ministry of Finance to expand fiscal deficits. The ministry, in turn, warned of financial risks of increasing local indebtedness and said that bank bailouts would not be forthcoming. Finance Ministry data show a quicker pace of government spending in recent months. Central bank figures, by contrast, show big increases in fiscal deposits. "The policy targets aren't clear, and there are difficulties in choosing the priority between ensuring growth and pressing ahead with reforms," said Chen Xingdong, chief China economist with BNP Paribas.

[Editor’s Note: These internal divisions also reflect tensions as Beijing attempts to shift to a more sustainable economic model. Beijing has set ambitious, but conflicting targets: it wants economic growth to remain at least 6.5 percent while cutting debts and shrinking industrial capacity. It also wants zombie companies to go bust, but doesn't want lay-offs; and it wants to give markets "a decisive role" in resource allocation but retain a strong government hand in economy activity.]

Related Categories: China; China and East Asia Program

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