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The final sentence has been written for the shutdown of zombie companies. The Central Economic Work Conference held in December 2015 vowed to resolve industrial overcapacity， wherein a crucial aspect for its success will be the restructuring of zombie companies. Most of those defunct companies will be shut down or reorganized within three years， said Zhang Yi， Chairman of the State-Owned Assets Supervision and Administration Commission of the State Council （SASAC）， at a meeting held in Beijing on January 15.
“Industrial overcapacity will not be thoroughly resolved， and economic restructuring will not be realized unless zombie companies are closed，” said Feng Fei， Vice Minister of Industry and Information Technology. “We can only make progress after we shut down enough zombie companies.”
Three defects
U.S. economic commentator Peter Coy defined zombie companies as organizations that have no way to continue their operations， but have not gone through bankruptcy. These enterprises use bank loans or government funding to survive.
Feng also defined zombie companies as those that suffer losses for a long time， and therefore have no hope to make up for their arrears， but are nevertheless difficult to shut down.
“These companies are much like the zombies you see in horror films. They have lost their vitality， but are still hanging on due to ‘blood’ transfusions. Sometimes they are even quite harmful，” described Wang Jiang vividly. Wang is a research fellow at SASAC’s research center.
Undoubtedly， these inoperative companies will damage their industries and intensify potential risks in the macroeconomy.
Zombie companies produce no economic benefits but still consume a large amount of resources such as land， funds， energy and labor， reducing the efficiency of resource allocation and making it impossible for resources to be distributed to sectors of higher economic benefits. In Jinhua of east China’s Zhejiang Province， there were a total of 1，542 companies at the end of 2014 that had reported no income tax for three consecutive years， even though those companies occupied a combined 1，713 hectares of land in the city， according to a report from People’s Daily.
Being uncompetitive in business， some zombie companies even disrupt the market order. For instance， in previous years when steel prices were high， some of those moribund companies “rose from the dead” and rushed into the steel industry， intensifying overcapacity and further cutting down the profit rate in the industry. “For the purpose of maintaining social stability， some local governments still offer support to zombie companies. This causes unfair competition，”Feng said. Without solvency， yet still leeching vitality， those inanimate companies are likely to increase financial risk. According to Wang， zombie companies borrow a lot from banks and even private lenders. To avoid a zombie company’s bankruptcy， which would result in their loans becoming bad assets， some commercial banks have continued pumping credit into them. Therefore， these companies must be dealt with in order to prevent an increase in non-performing loans.
Difficult disposal
Why is it difficult for zombie companies to exit the market？
According to Feng， such companies in China can be either reorganized through market-oriented ways or go bankrupt in accordance with the law. “But in practice， complete exit mechanisms are not yet available，” he said.
One of the difficulties is the settlement arrangement for those companies’ employees. According to Wang， some zombie companies were left over by the reform of state-owned enterprises in the 1990s. For large organizations or those with complicated ownership and debt disputes， undergoing reform was too complex to succeed， despite their poor business performance.
Heilongjiang Longmay Mining Holding Group Co. Ltd.， for example， is the largest coal company in northeast China. The group reported net losses of 800 million yuan （$121.95 million） and 2.3 billion yuan（$350.61 million） in 2012 and 2013 respectively. In 2014， the losses reached 6 billion yuan （$914.63 million）. The production capacity of Longmay is only one tenth of that of the industrial leader Shenhua Group， but both organizations employ about 200，000 workers. Organizing the compensation of such a large number of employees would be inevitable regardless of whether Longmay is shut down or reorganized. Their employee rosters are almost equivalent to the population of a small city， complicating reemployment prospects.
“How are zombie companies to compensate their employees？” said Wang， pointing out that arranging the employees’settlements is particularly difficult in thirdtier cities. According to him， it is difficult for some cities that are small in economic scale to attract private investment for the restructuring of zombie companies. Due to the cities’ limited economic sizes， they are unable to create enough jobs， and most of the laid-off workers are poorly educated， making it more difficult for them to find new jobs. “In response to concerns that poor employee settlement agreements might affect social stability， some local governments require commercial banks to continue offering loans so as to maintain their business operations，” said Wang. In addition， the legal system for the shutdown of zombie companies is not sound. According to Feng， some provisions in the Enterprise Bankruptcy Law are too general， and more detailed measures must be drafted. For example， it is difficult for companies to file for bankruptcy， and the bankruptcy procedures are too lengthy.
Also， some local governments as well as moribund companies have their own selfish schemes to save money， further prolonging their malaise. To complete the liquidation procedure， a company must pay back taxes and wages. If there are debt disputes that must be solved through litigation， zombie companies would have to pay a large sum of court costs and attorney fees.
Government’s role
“There are many reasons for the formation of zombie companies，” said Wang. “This reminds us that in the new round of reform， we must be bold enough to crack hard nuts such as these. We should also be more prudent in shaping new industrial policies so as to prevent any more of these companies from emerging.”
The government can become a “matchmaker” to facilitate the reorganization of defunct companies， according to the report of People’s Daily， which provided an example of a zombie company’s reorganization in Zhejiang’s Shaoxing. Due to the economic slowdown and shortage of capital since 2013， Yuezhou Papermaking Co. Ltd. had become seriously indebted. The government of Shangyu District， where Yuezhou Papermaking is located， had several discussions with the company and had reached an agreement for the disposal of its assets as well as the settlement agreement for its employees. With the help of the Shangyu District Government， Xiamen Hexing Packaging and Printing Co. Ltd. from Fujian Province acquired Yuezhou Papermaking through a judicial auction， taking over both the 64，000-square-meter workshop and the 100-plus disabled workers of the latter.
Feng thinks that market-oriented measures should be used in most restructuring cases. “The government should mainly provide support in the settlement of employees， but not directly offer financial aid to rescue zombie companies，”said Feng.
“The United States has had success in disposing zombie companies in the past—formulating targeted policies for different types of organizations， while reducing governmental risk. On the other hand， Japan also offers some lessons—the government didn’t take decisive measures， and as a result， many companies lost opportunities for growth，” said Liu Xingguo， a research fellow at the China Enterprise Confederation.
“Under current circumstances， classified guidance is very necessary，” said He Weida， a professor at the Dongling School of Economics and Management at the University of Science and Technology Beijing. He thinks that in pillar industries， zombie companies must be shut down， but the government should continue to support some companies in order to promote the sound development of their industry. To the companies in conformity with the country’s innovation and environmental protection policies， but with poor business performance， the government must offer even more support， avoiding rigid uniformity in disposing inactive companies.
Wang also warns against possible injury by mistake. “The government must be prudent in distinguishing zombie companies and avoid defining those in cyclical difficulties as targets for liquidation， which could adversely affect the foundation of the national economy，” he said.
“Industrial overcapacity will not be thoroughly resolved， and economic restructuring will not be realized unless zombie companies are closed，” said Feng Fei， Vice Minister of Industry and Information Technology. “We can only make progress after we shut down enough zombie companies.”
Three defects
U.S. economic commentator Peter Coy defined zombie companies as organizations that have no way to continue their operations， but have not gone through bankruptcy. These enterprises use bank loans or government funding to survive.
Feng also defined zombie companies as those that suffer losses for a long time， and therefore have no hope to make up for their arrears， but are nevertheless difficult to shut down.
“These companies are much like the zombies you see in horror films. They have lost their vitality， but are still hanging on due to ‘blood’ transfusions. Sometimes they are even quite harmful，” described Wang Jiang vividly. Wang is a research fellow at SASAC’s research center.
Undoubtedly， these inoperative companies will damage their industries and intensify potential risks in the macroeconomy.
Zombie companies produce no economic benefits but still consume a large amount of resources such as land， funds， energy and labor， reducing the efficiency of resource allocation and making it impossible for resources to be distributed to sectors of higher economic benefits. In Jinhua of east China’s Zhejiang Province， there were a total of 1，542 companies at the end of 2014 that had reported no income tax for three consecutive years， even though those companies occupied a combined 1，713 hectares of land in the city， according to a report from People’s Daily.
Being uncompetitive in business， some zombie companies even disrupt the market order. For instance， in previous years when steel prices were high， some of those moribund companies “rose from the dead” and rushed into the steel industry， intensifying overcapacity and further cutting down the profit rate in the industry. “For the purpose of maintaining social stability， some local governments still offer support to zombie companies. This causes unfair competition，”Feng said. Without solvency， yet still leeching vitality， those inanimate companies are likely to increase financial risk. According to Wang， zombie companies borrow a lot from banks and even private lenders. To avoid a zombie company’s bankruptcy， which would result in their loans becoming bad assets， some commercial banks have continued pumping credit into them. Therefore， these companies must be dealt with in order to prevent an increase in non-performing loans.
Difficult disposal
Why is it difficult for zombie companies to exit the market？
According to Feng， such companies in China can be either reorganized through market-oriented ways or go bankrupt in accordance with the law. “But in practice， complete exit mechanisms are not yet available，” he said.
One of the difficulties is the settlement arrangement for those companies’ employees. According to Wang， some zombie companies were left over by the reform of state-owned enterprises in the 1990s. For large organizations or those with complicated ownership and debt disputes， undergoing reform was too complex to succeed， despite their poor business performance.
Heilongjiang Longmay Mining Holding Group Co. Ltd.， for example， is the largest coal company in northeast China. The group reported net losses of 800 million yuan （$121.95 million） and 2.3 billion yuan（$350.61 million） in 2012 and 2013 respectively. In 2014， the losses reached 6 billion yuan （$914.63 million）. The production capacity of Longmay is only one tenth of that of the industrial leader Shenhua Group， but both organizations employ about 200，000 workers. Organizing the compensation of such a large number of employees would be inevitable regardless of whether Longmay is shut down or reorganized. Their employee rosters are almost equivalent to the population of a small city， complicating reemployment prospects.
“How are zombie companies to compensate their employees？” said Wang， pointing out that arranging the employees’settlements is particularly difficult in thirdtier cities. According to him， it is difficult for some cities that are small in economic scale to attract private investment for the restructuring of zombie companies. Due to the cities’ limited economic sizes， they are unable to create enough jobs， and most of the laid-off workers are poorly educated， making it more difficult for them to find new jobs. “In response to concerns that poor employee settlement agreements might affect social stability， some local governments require commercial banks to continue offering loans so as to maintain their business operations，” said Wang. In addition， the legal system for the shutdown of zombie companies is not sound. According to Feng， some provisions in the Enterprise Bankruptcy Law are too general， and more detailed measures must be drafted. For example， it is difficult for companies to file for bankruptcy， and the bankruptcy procedures are too lengthy.
Also， some local governments as well as moribund companies have their own selfish schemes to save money， further prolonging their malaise. To complete the liquidation procedure， a company must pay back taxes and wages. If there are debt disputes that must be solved through litigation， zombie companies would have to pay a large sum of court costs and attorney fees.
Government’s role
“There are many reasons for the formation of zombie companies，” said Wang. “This reminds us that in the new round of reform， we must be bold enough to crack hard nuts such as these. We should also be more prudent in shaping new industrial policies so as to prevent any more of these companies from emerging.”
The government can become a “matchmaker” to facilitate the reorganization of defunct companies， according to the report of People’s Daily， which provided an example of a zombie company’s reorganization in Zhejiang’s Shaoxing. Due to the economic slowdown and shortage of capital since 2013， Yuezhou Papermaking Co. Ltd. had become seriously indebted. The government of Shangyu District， where Yuezhou Papermaking is located， had several discussions with the company and had reached an agreement for the disposal of its assets as well as the settlement agreement for its employees. With the help of the Shangyu District Government， Xiamen Hexing Packaging and Printing Co. Ltd. from Fujian Province acquired Yuezhou Papermaking through a judicial auction， taking over both the 64，000-square-meter workshop and the 100-plus disabled workers of the latter.
Feng thinks that market-oriented measures should be used in most restructuring cases. “The government should mainly provide support in the settlement of employees， but not directly offer financial aid to rescue zombie companies，”said Feng.
“The United States has had success in disposing zombie companies in the past—formulating targeted policies for different types of organizations， while reducing governmental risk. On the other hand， Japan also offers some lessons—the government didn’t take decisive measures， and as a result， many companies lost opportunities for growth，” said Liu Xingguo， a research fellow at the China Enterprise Confederation.
“Under current circumstances， classified guidance is very necessary，” said He Weida， a professor at the Dongling School of Economics and Management at the University of Science and Technology Beijing. He thinks that in pillar industries， zombie companies must be shut down， but the government should continue to support some companies in order to promote the sound development of their industry. To the companies in conformity with the country’s innovation and environmental protection policies， but with poor business performance， the government must offer even more support， avoiding rigid uniformity in disposing inactive companies.
Wang also warns against possible injury by mistake. “The government must be prudent in distinguishing zombie companies and avoid defining those in cyclical difficulties as targets for liquidation， which could adversely affect the foundation of the national economy，” he said.