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Zombie companies

Zombie companies

With the global economy slowing, the fever pitch of China economy has also cooled.

But not as much as financial analysts would expect.  The reason: the Chinese government is propping up its faltering businesses.  The result: “zombie” companies, huge government-owned businesses that are hemorrhaging billions of dollars each year. 

Government backstopping of faltering businesses

"While China’s debt build-up has alarmed analysts for years, a reckoning has been avoided with few signs of spikes in bankruptcy or bad loans. This is made possible by one-party state-capitalism, where predominately government-owned companies owe money to government-owned banks, all of which have ultimately been backstopped by Beijing" (Craig Stephen).

Cosco, China’s huge shipping business, is an example.  “The company lost Rmb3.8bn ($580m) in the first nine months of 2015. Its net debt-to-equity ratio, at 206 per cent at the end of September, was more than triple the average of 66 per cent for Shanghai-listed companies, according to Wind Information, a Chinese financial database” (Gabriel Wildau).  But instead of scaling back, Cosco ordered 11 new cargo ships at the cost of $15 billion.

Lay-offs are not an option

Since the Chinese government cannot continue to prop up zombie companies indefinitely, mass lay-offs of millions of workers is on the horizon.  But Beijing will continue to work to avoid that. Huge numbers of unemployed Chinese will create social unrest. 

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For more information, listen to Gabriel Wildau's podcast