Resolving China's Zombies: Tackling Debt and Raising Productivity

Lam, W. Raphael; Schipke, Alfred; Tan, Yuyan; Tan, Zhibo

doi:10.5089/9781484330722.001

Cited by 19 publications

(17 citation statements)

References 18 publications

(18 reference statements)

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“…There is a large literature quantifying the impact of various reforms on productivity in China, in particular state-owned enterprises (SOE) reform. Lam et al (2017), Zhang (2016) and Lardy (2016) all suggest a sizable boost to productivity growth.…”

Section: Sectoral Shares Of Employment and Value Addedmentioning

confidence: 99%

“…With their asset size standing at 60 percent of GDP, raising the ROA of industrial SOEs to 6 percent could boost GDP growth by around 1 percentage point. In addition, using firm-level data Lam et al (2017) show that progress in SOE reforms could raise productivity and GDP growth by 0.7-1.2 percent per year; required policies include more proactive exits of zombie firms and hardening the budget constraints of SOEs to improve credit allocation efficiency. With faster productivity growth, the convergence of the industrial sector would accelerate, reaching 66 percent of frontier by 2030, compared with 56 percent in the baseline.…”

Section: State-owned Enterprise Reformmentioning

confidence: 99%

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China’s Productivity Convergence and Growth Potential—A Stocktaking and Sectoral Approach

Zhu¹,

Zhang²,

Peng³

2019

IMF Working Papers

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China’s growth potential has become a hotly debated topic as the economy has reached an income level susceptible to the “middle-income trap” and financial vulnerabilities are mounting after years of rapid credit expansion. However, the existing literature has largely focused on macro level aggregates, which are ill suited to understanding China’s significant structural transformation and its impact on economic growth. To fill the gap, this paper takes a deep dive into China’s convergence progress in 38 industrial sectors and 11 services sectors, examines past sectoral transitions, and predicts future shifts. We find that China’s productivity convergence remains at an early stage, with the industrial sector more advanced than services. Large variations exist among subsectors, with high-tech industrial sectors, in particular the ICT sector, lagging low-tech sectors. Going forward, ample room remains for further convergence, but the shrinking distance to the frontier, the structural shift from industry to services, and demographic changes will put sustained downward pressure on growth, which could slow to 5 percent by 2025 and 4 percent by 2030. Digitalization, SOE reform, and services sector opening up could be three major forces boosting future growth, while the risks of a financial crisis and a reversal in global integration in trade and technology could slow the pace of convergence.

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Section: Sectoral Shares Of Employment and Value Addedmentioning

confidence: 99%

Section: State-owned Enterprise Reformmentioning

confidence: 99%

China’s Productivity Convergence and Growth Potential—A Stocktaking and Sectoral Approach

Zhu¹,

Zhang²,

Peng³

2019

IMF Working Papers

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“…If China's economic growth slows further or if the Chinese government's deleveraging policy leads to turmoil in credit markets, it is not unreasonable to imagine that certain types of liquidity or debt crisis may occur, at least in certain regions or industries. For example, in industries with overcapacity, such as coal, steel, and cement, and in the West, North, and Northeast regions, such as Ningxia, Qinghai, Hebei, Shanxi, Heilongjiang, and Jilin, there are numerous so‐called ‘zombie firms’ facing insolvency problems (Lam et al ; Shen and Chen ). Financial distress in these firms and industries is so severe that the Economist Intelligence Unit (EIU) () reports that it would take 91 years and 74 years, respectively, for the coal and ferrous‐metal (including steel) smelting industries to pay back their debts.…”

Section: China's Financial Repression and Financial Vulnerabilitymentioning

confidence: 99%

From financial repression to financial crisis? The case of China

Gui

2019

Asian-Pac Economic Lit

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This study explores the connections between financial repression policies and the possibility of financial crisis, a relationship that has been overlooked in previous literature. We focus on China, a country with one of the highest levels of financial repression in the world. China's case shows that when financial repression is maintained at a modest level, as the government did before 2008, the possibility of a financial crisis is low; however, when financial repression policies are pushed to an excessive level, as the government did after 2008, the national asset‐liability structure may be damaged to such an extent that a financial crisis becomes likely. The key to understanding the changing role of China's financial repression policies lies in the survival strategy of the Chinese party‐state, which regards finance as a powerful weapon and is eager to use it to address certain economic, political, or social problems that may endanger its rule.

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“…Moreover, some policies targeting zombie firms could be misguided because they neglect the real cause of economy-wide debt. Recent Lam et al (2017) shows that zombies accounted for a small share of total Chinese corporate debt; the highest share since 2009 was 6 percent in 2016. However, our study does not necessarily argue against the efforts of the Chinese government to spotlight the negative impact of zombie firms on the economy.…”

mentioning

confidence: 99%

Zombie Firms and Debt Accumulation: A Theoretical Framework and Chinese Experience

Zhu

Wang

et al. 2019

China and World Economy

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In recent years, as China has grappled with rising debt and broad economic restructure, the prevalence of zombie firms has become a critical problem. This paper provides a theoretical framework illustrating the rationale behind the occurrence of zombie firms from the perspective of banks. We develop differential equations to model a bank's expectation and the ex ante estimate that underlies its decision to refinance an insolvent borrower. An optimistic expectation is essential in zombie lending and is intrinsic to the countercyclical pattern of zombie firms. Our model also predicts that debt can build up to an unsustainable level if recovery of profitability is sluggish or the initial debt burden is too high. Examining the Chinese experience of zombie firms over 2007−2017, this paper highlights two findings. First, the share of zombie firms among Shanghai and Shenzhen A-share listed companies demonstrates a countercyclical pattern. Second, the positive correlation between zombie share and debt accumulation across manufacturing sectors sheds light on the link between zombie firms and the rising corporate debt in China. To deal with the "zombie" problem, the government should carefully weigh its policies to avoid further distortions because the occurrence of zombie firms may be inevitable and impossible to eliminate.

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Resolving China's Zombies: Tackling Debt and Raising Productivity

Cited by 19 publications

References 18 publications

China’s Productivity Convergence and Growth Potential—A Stocktaking and Sectoral Approach

China’s Productivity Convergence and Growth Potential—A Stocktaking and Sectoral Approach

From financial repression to financial crisis? The case of China

Zombie Firms and Debt Accumulation: A Theoretical Framework and Chinese Experience

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