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.
For more information, listen to Gabriel Wildau's podcast