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