Zombie companies: Ending drag on global economy now vital

Zombie companies: Ending drag on global economy now vital

Summary


Over the past decade the number of zombie companies - generally recognized as enterprises unable to pay interest on debts and being over 10 years old - has soared. Now they represent a serious problem to the global economy. A problem seemingly devoid of easy solutions, closing zombies and allowing more profitable and vibrant firms to fill the resultant gap demands widespread reform.

Traditionally associated with Chinese state-backed firms flushed with cheap credit and guaranteed contracts, the problem extends around the world and would be a serious danger in the event of another recession. Were the number of zombies to be reduced to a more sustainable level barriers to reinvigorating the global economy would reduce in size.

Key Highlights

  • Now the prevalence of zombie companies is exerting strain; the wider economic impact could have global ramifications. Estimates vary how many zombie companies are present in China, but the issues faced by central and regional governments now pose serious threats to sustainable growth regardless of what the true number may be.
  • Creating zombies is part of normal economic activity but what marks out recent times from history is that existing zombies are not dying as they once did, meaning any new zombies are added to the group of companies only surviving through the goodwill of banks, creditors and governments.
  • Zombie companies inflict widespread damage to entire economies because the amount of capital invested into them is unproductive compared to that risked against the success of profitable firms. Raising barriers against the growth of smaller, nimbler players not only harms growth but dynamism inside a market or industry.
Scope
  • Examines the extent of the zombie company problem.
  • Looks at what can be done about the prevalence of such companies.
  • Assesses the influence of the Chinese state on the problem via SOEs.
  • Scrutinizes some of the leading causes of zombies.
  • Looks at the problems the wider economy faces due to zombies.
Reasons to buy
  • What damage do zombie companies inflict on economies?
  • How bad is the problem?
  • What can be done about zombie firms?
  • Is China the worst offender?
  • Should zombie firms just be allowed to die?


Overview
Catalyst
Summary
Chinese zombie company problem is serious economic threat
Zombie state-owned-enterprises have long been a damaging economic feature in China
Zombie SOEs threaten to drag down economy amid worsening global outlook
Beijing is attempting to reduce the number of zombies - doing so without incurring extensive economic damage will be tough
Solutions to Chinese zombie problem are all hard but Beijing must pick one
Biggest risk of zombies is damage to smaller companies that should be replacing them
Globally, solutions to stop zombies are forming
Europe must do everything possible to end zombie companies to avoid damaging consequences
China is changing laws and law enforcement to reduce zombie numbers
Changing how banks deal with zombies will ease global problem
Zombies damage wider economic performance
Prevalence of zombie companies raises barriers to global economic vitality
New entrants face unnecessary barriers to success thanks to zombies
Conclusions
Solving zombie company problem is far from easy but absolutely necessary for the global economy
Appendix
Sources
Further Reading
Ask the analyst
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Disclaimer
List of Tables
Table 1: Distribution of firms in China, 2008
List of Figures
Figure 1: Comac C919
Figure 2: Erzhong built press forge
Figure 3: China road infrastructure spending 2007 to 2015 (EURbn)
Figure 4: Leading regions of bond failures for January 2018 to November 2018 (CHNbn)
Figure 5: January 2018 to November 2018 China bond defaults (CHNbn)
Figure 6: Hanjin Shipping
Figure 7: Zombie company sign
Figure 8: The share of capital sunk in zombie firms in 2013; 15 OECD countries

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