Zombie allusions: They just keep on coming™: "One approach would be liquidation..."

China’s Zombie Companies and Japan’s Lost Two Decades

Japan’s experience is instructive for China economy watchers.

By Kai Kajitani

January 07, 2017

"So, are zombie companies really worsening the performance of the Chinese economy? In short, the effects have manifest as a slump in private sector investment. For instance, the year-on-year growth rate for cumulative fixed asset investment in the private sector for the period from January to July 2016 was 2.1 percent, the lowest rate of growth since statistics began to be published. Although private sector investment has rebounded slightly in response to the government’s investment promotion policies in the months since, a situation where the increase in the money supply and bank lending is not adequately linked to the increase in private sector investment has persisted. Per the research of Caballero et al., this slumping private sector investment is precisely the kind of harmful effect that results from the continued existence of many zombie companies.

What policies, then, should be used to address the declining productivity of these zombie companies? One approach would be liquidation – that is, to mercilessly force zombie companies with low profitability and large debts to exit the market, dispose of the debt and ensure that funds are allocated to more productive firms. However, the drastic measures to reorganize debt through a liquidation approach could trigger sweeping lay-offs and cause a sharp rise in the unemployment rate. This could have the unintended effect of actually pushing productivity down further due to human resources not being effectively utilized."