Across The Border | China’s plan to kill zombie firms faces resistance at local level
Fears of mass unemployment and social unrest mean local authorities are reluctant to carry out central government’s plan
Despite a central government drive to cut overcapacity and shut down so-called “zombie” companies, local authorities in China may be reluctant to kill off these loss-making entities, put off by the risk of social instability sparked by large-scale job losses.
China’s powerful economic planner - the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) - recently announced an ambitious plan. It required central government-controlled state-owned enterprises (SOEs) to reduce their excess capacity by 10 per cent in two years and pledged to shut down 345 “zombie companies” in three years.
Trials of the scheme are being conducted first in the steel and coal sectors.
According to the National Academy of Development and Strategy, a government think-tank, zombie companies are defined as those that receive government-backed loans, either directly or indirectly, for two consecutive years.
Five to six million workers may lose their jobs as a result of Beijing’s efforts to reduce overcapacity and shut down zombie companies in crowded sectors, a report by Reuters said earlier this year. By the end of 2015, total employment at SOEs was approximately 62 million, according to government statistics.
The risk of high unemployment and the possible social unrest it causes means local governments have genuine political reasons to keep zombie companies alive, analysts say, particularly as many of these entities effectively prop up the local economy.