The debt burden of Chinese “zombie” enterprises accounts for a smaller share of total corporate debt than previously expected, according to a new study from the International Monetary Fund.
The new IMF working paper by Raphael Lam, senior IMF economist in Washington, and Alfred Schipke, senior resident representative for the IMF’s China headquarters, claims that zombie enterprises accounted for only 5% to 9% of China’s total corporate debt as of the end of last year.
Companies in China’s overcapacity sectors, including aluminium, cement, coal, plated glass and steel, accounted for only 16% of total corporate debt.
Beijing has previously indicated that addressing the exorbitant debt burden of China’s corporate sector, and in particular its state-owned enterprise sector, was the “priority of priorities” for its economic deleveraging campaign.
Chinese authorities have also expressed concern over the potential for zombie SOE’s to suck up scarce credit at the expense of more productive companies, with the banking regulator seeking to ban their access to life-saving debt-for-equity swaps.
Despite its comparatively small share of the total, Lam and Schipke contend that addressing the problem of zombie enterprise debt would bring dramatic benefits to the Chinese economy, given that it remains disproportionate in relation to the contribution made by such companies to total production and employment.
They point out that the ongoing presence of zombie enterprises can prevent more efficient Chinese companies from accessing finance, as well as other key economic inputs such as labour.
Their study estimates that China’s economy could enjoy a GDP growth boost of 0.7 – 1.2 percentage points per year over the next ten to fifteen years if weak companies are improved and overcapacity reduced.
This would translate into a cumulative economic increase of 16 – 28% by the end of the period.
“Resolving weak firms such as zombies is a first step in addressing debt vulnerabilities and raising productivity gains,” said the paper.
“The government should harden budget constraints for zombies and SOE’s in general by suspending implicit support on credit access and allowing greater corporate defaults.”
The figures produced by the IMF working paper are consistent with other key sources, with data from the Bank for International Settlements indicating that zombie enterprise debt accounts for 6% to 11% of GDP and companies in overcapacity sector 21%, out of total corporate debt of 166%.