‘Zombie Company’ Apocalypse Looms in China | China Economy and Trade

Zombie companies in China. They’re bad for economic growth. and they’re eating up money like tasty brains. But there’s just no easy fix. for China’s coming zombie apocalypse. Welcome back to China Uncensored. I’m Chris Chappell. Zombies. They’re running amok in China. And no, I’m not talking about World War
Z, the book version, where the zombie apocalypse is triggered by organ trafficking in China. I’m talking about Chinese zombie companies. And they’re not as easy to kill as the Chinese Communist Party would like. That’s according to a study called “The mystery of zombie enterprises: stiff but deathless.” China’s zombie enterprises are state-owned companies that are consistently unprofitable— companies that, in a free market, would go bust. But in China’s state-managed economy, they’re artificially kept alive, thanks to what the study’s authors call repeated “blood transfusions.” Which makes them seem more like vampires than zombies. Zampires? Vombies? These “blood transfusions” are state-sponsored loans and subsidies. They’re what make these failing zombie companies “stiff but deathless.” These zombie companies are a problem for China’s economy as a whole— because they’re unproductive, they don’t innovate, and they don’t contribute to economic growth. Just like real zombies. “The persistence of zombie enterprises not only occupies precious resources,” the study says, “but also causes financing problems for other enterprises and lowers the production efficiency of the whole industry.” As this legion of the undead stumbles along thanks to Chinese government subsidies, it hurts productive companies… by eating their brains. Or at least by eating up resources that productive companies would otherwise
get. According to the European investment bank,
UBS, China’s economy is becoming less and less
efficient— partly as a result. Compared to a decade ago, it now takes twice as much capital to create the same amount of GDP growth. It’s hard to pin down the true number zombie firms in China, because, well, the Chinese Communist Party is not real good at transparency. In the same way that a brick wall is not real good at being a window. Official data from the State-owned Assets Supervision and Administration Commission,
or SASAC, says there are about 2,000 zombie companies run by the central authorities. But that’s just a fraction. Add in all the zombie companies overseen by local governments, and you get at least 10,000. But even that number is not easy to pinpoint. Because officials aren’t really motivated to do accurate reporting. “This is a case where these local governments, it seems, a number of them, have drawn up list of zombie companies in their jurisdictions, but are holding back on revealing those to
the banks… And it’s also the case, we’ve heard, that banking regulators in some of these provinces are also being kept in the dark.” And that was back in 2016. At the time, there was a broad push to fix broken parts of the Chinese economy. And Premier Li Keqiang launched an initiative for the “active and safe disposal of zombie
enterprises”. But fast forward three years, and that still hasn’t happened. Earlier this month, the head of China’s biggest aluminum producer warned that zombie enterprises are hampering China’s economic transformation. The zombie apocalypse is so nigh, that Xi Jinping himself recently vowed to slay the zombie hordes once and for all. He warned that China must be on guard against ‘grey rhinos’— which are highly obvious yet ignored threats. Which is weird, because in other countries, people think of rhinos as endangered species that should be protected. Anyway, back in December, 11 top Chinese regulatory and policymaking
bodies got together and pledged to get rid of zombie companies by 2020. Just like Premier Li Keqiang pledged to do back in 2016. But this time, it’s gonna be for real. And these regulators promised to publish a list of zombie companies within
three months. So that was December. Let’s see, January, February, March, hey that’s three months and…no list. Instead, we got only a statement on March
9 from Xiao Yaqing, head of the state assets regulator. And he was like, “Everything’s fine. State-owned enterprises are totally independent market players.” Although I’m not sure I trust a guy who— judging by this photo— is probably an actual zombie himself. I know what you’re thinking, “That’s just a joke, that photo probably just had bad lighting”. No, I’m serious. I’ve looked through a lot of photos of Xiao
Yaqing and I’m pretty sure he’s an actual zombie. Either that or he’s personally giving blood transfusions to the zombies. Zampires. Vombies. Xiao said that anybody who claims there’s a systematic arrangement for state-owned companies to get subsidies from the Chinese state is spreading fake news. Because these companies “are self-operated, self-financed, self-sustained, self-disciplined and self-developed.” Except…he’s lying. And he probably want to eat your brains. Remember that report, “the mystery of zombie enterprises – “stiff but deathless”’? Turns out it’s not that big of a mystery
why zombie companies—especially the biggest
ones— continue their long march of the undead. Brains. Sorry, I meant jobs. Zombie firms might pile mountains of bad debt on the banking system and hurt the economy in the long term by being unproductive— but in the short term, they provide jobs. And for the Chinese Communist Party, jobs and economic prosperity are the only reasons they’re still in power. Just ask driver Wong Wei. He blames his lost job in the coal industry when the Chinese regime moved to lay off 1.8 million workers in several zombie industries. “I borrowed more than I can afford just to buy this truck” says driver Wong Wei, “now no work, I’m angry with the government.” So Wong Wei thinks that the Chinese government is going the incorrect
direction. I guess he should know. Zombie companies operate on a simple formula. They “exist as a direct result of the resources and credit endorsements they receive from the government.” And “the companies that offer a greater
number of jobs receive more government subsidies.” And there are more poorly thought-out incentives. Local officials get job promotions if they meet employment targets in their regions. So as long as a company provides jobs, local officials try to protect it from getting
shut down. And as a result, local officials hide bad companies from central regulators who might want to
put them on lists of zombie companies to be eliminated. Sometimes, local officials even help them get more loans through hidden off-balance sheet transactions. “S&P credit analysts were using some colorful language to describe the risks around this, saying that the debt they’re talking about
is, the potential debt, is like an iceberg with titanic credit risks.” “Put that on top, by the way, of what we know the official numbers in terms of debt  in China, 260% at the very least to GDP, and it starts to add up to some pretty frightening numbers.” And for people who’ve been around the block
a few times, like this retired businessman, China’s plan to kill off or restructure its horde of zombie companies is doomed to
fail. “Even if they start to reform, it won’t
be deep because it’s related to the stability of the Communist regime and it’s related
to the nature of the government. The Communist government is established on
the state-owned economy. If they carry out deep SOE reform, they have
to change themselves.” And nobody wants to change themselves. So what do you think about China’s zombie
company apocalypse? Leave your comments below. And now it’s time for me to answer a question from a member of our 50-Cent Army who supports China Uncensored through the crowdfunding website Patreon. Sean Connelly asks: “Does the fifty cent army pledge level in any way refer to the Chinese company tencent? And if yes, what is the deeper meaning behind
it?” Good question, Sean. The term 50-Cent Army doesn’t have anything to do with Tencent. Or the rapper 50 Cent. The original term refers to how the Chinese Communist Party pays online commenters to manipulate public
opinion by posting things online that support the
Party line. In Chinese, they’re called the Wu Mao Dang, which means 50-Cent Party. They’re sometimes also called the 50-Cent
Army. Originally the name came about because they were supposedly paid the equivalent of half a Chinese dollar— 50 cents—per post. When I first launched our Patreon site back
in 2015, I decided it would be clever to create our own group of supporters, and call it the “China Uncensored 50-Cent
Army.” I asked fans to contribute 50 cents or more per episode to support the show. A year later, credit card companies made a new rule that the minimum pledge had to be $1 dollar… but I kept the name “50-Cent Army.” Thanks for your question, Sean. And thank you for joining the 50-Cent Army! Possibly by accident. And thanks to all my 50-Cent Army soldiers who support China Uncensored. It’s only because of your support that we’ve been able to keep this show going for so many years. Once again, I’m Chris Chappell. See you next time.

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