China cracks down on subsidies to zombie companies as US trade war hits economy
- Reforms intend to encourage insolvent firms to close down so resources can be better allocated in the economy as Donald Trump’s tariffs take effect
- Plan unveiled just a day after it was confirmed gross domestic product (GDP) growth slowed to 6.2 per cent in the second quarter of 2019, the lowest on record
As part of its goal to make the economy more efficient, China unveiled a new reform plan on Tuesday to make it easier for companies, including zombie state-owned enterprises, to be closed down.
It intends to better allocate resources to unleash the economy’s growth potential, which is under pressure from the trade war with the United States, by lowering the cost of closing down insolvent firms.
The government “must fully employ the decisive role of the market in resource allocation, standardise market competition, reduce market distortions … and promote the flow of components and resources to the most efficient market entities,” the joint circular from 13 major ministries said.
The plan specifically forbids central government agencies and local governments from providing subsidies or loans to prop up the operation of state-owned firms that would not be financially viable without such help, which are known as zombie enterprises.
“For state-owned enterprises that already meet the criteria for bankruptcy, all related parties must not hinder their exit [from the market],” the circular said.