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.
However, the final decision on whether a firm is solvent or not is usually in the hands of local officials, who often are reluctant to act given the importance of such firms to the local economy.
The reform plan was jointly released by 13 major ministries, including the National Development and Reform Commission (NDRC), the People’s Bank of China, the Ministry of Finance, and the nation’s Supreme People's Court.
Tang Jianwei, a senior analyst with the Bank of Communications, warned that local opposition to the closure of state-owned firms remains strong, given they are often large contributors to local employment and tax revenue.
For state-owned enterprises that already meet the criteria for bankruptcy, all related parties must not hinder their exit [from the market]
The government will also study creating a mechanism that allows Chinese individuals to file for bankruptcy, the circular said.
Numerous detailed regulations will be needed to implement the new bankruptcy policy, since closing industrial or financial companies requires significant changes in employment and disposal of large amounts of debt, Tang suggested.
“Amidst external pressure and changes in state capitalism, China still needs to improve its market mechanisms and business environment, open its market wider and integrate itself with best international practices” he said.
The latest reform effort would, at least on the surface, seek to address some of the widespread complaints about China’s dual-track economic system, where state-owned firms are often offered preferential treatment at the expense of private enterprises, even though the latter group contributes more than 60 per cent of the GDP and over 80 per cent of new urban jobs.
Private firms are more vulnerable to the current economic slowdown given restrictions on market access, constraints on their access to credit and the heavy impact of the trade war on the many private sector export firms.
On other hand, the dominance of state-owned enterprises, which usually control upstream resources and have access to cheap credit from state-owned financial institutions, remain largely intact despite the economic slowdown.
Speaking at an economic analysis meeting on Monday, members of the Chinese People’s Political Consultative Conference, the country’s top political advisory body, urged the government to pursue further structural reforms to create new growth drivers so as to double the nation’s middle-income population.
