The Life‐cycle Dynamics of Zombie Companies amongst Listed Firms in China

• Published date: 01 September 2022
• Author: Joel Bowman
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/cwe.12442

China & World Economy / 185–205, Vol. 30, No. 5, 2022 185

Legal Statement: This is an open access article under the terms of the Creative Commons Attribution License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited.

© 2022 The Authors. China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

Funding Statement: Open access publishing facilitated by Australian National University, as part of the Wiley - Australian

National University agreement via the Council of Australian University Librarians.

*Joel Bowman, PhD Candidate, Crawford School of Public Policy, Australian National University, Australia.

Email: joel.bowman@anu.edu.au. This research is supported by an Australian Government Research Training

Program Scholarship. The author would like to thank Ligang Song, Yixiao Zhou, and anonymous reviewers

for their helpful comments.

The Life-cycle Dynamics of Zombie Companies

amongst Listed Firms in China

Joel Bowman*

Abstract

This paper analyses the life-cycle dynamics of zombie companies – broadly defined

as businesses that are consistently unable to meet their interest expenses from current

profits – amongst listed firms in China over the period 2008−2019. A large share of

zombie companies subsequently return to nonzombie status. This proportion is higher

for fi rms undergoing a major restructuring event, low leverage levels, and with smaller

operating expense ratios. However, zombie firms that return to nonzombie status

continue to have lower levels of profitability compared with their industry peers and

have a higher probability of relapsing into zombie status compared with fi rms that have

never been classified as zombie. Concerted efforts to revive zombie companies using

major restructuring events appear insuffi cient in overcoming the longer term scarring

eff ects of zombifi cation on fi rms’ profi tability. The results highlight the potential benefi ts

of the ongoing eff orts by Chinese regulators to improve the delisting process.

Keywords: China, laggards, survival analysis, zombie companies

JEL codes: D24, E22, G30, G33

I. Introduction

The prevalence of zombie companies has grown internationally. Some researchers

argue that this is linked to the reduced financial pressures faced by firms (Banerjee

and Hofmann, 2018). These trends are concerning because zombie companies hinder

productivity growth by crowding out resources and impeding the efficient allocation

of resources (McGowan et al., 2018). The implementation of large-scale fiscal and

monetary easing globally during the COVID-19 pandemic has also increased the risk of

nonviable zombie companies being kept alive, which may hinder economic activity in

the long run. The economic backdrop highlights the need for researchers to improve our

Joel Bowman / 185–205, Vol. 30, No. 5, 2022

186

Legal Statement: This is an open access article under the terms of the Creative Commons Attribution License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited.

© 2022 The Authors. China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

Funding Statement: Open access publishing facilitated by Australian National University, as part of the Wiley - Australian

National University agreement via the Council of Australian University Librarians.

understanding of the nature and dynamics of zombie companies to appreciate better the

risks that these companies may present.

China has not been immune to concerns over the prevalence and impact of zombie

companies. Zombie fi rms account for an outsized share of corporate debt, and a positive

outcome for these firms can help boost China’s long-term economic growth outlook

(Lam et al., 2017).

In contrast with broad international experience, the Chinese government has

responded to the rise of zombie firms. The resolution of zombie firms has been a

key pillar behind the government’s supply-side structural reform. The State Council

mandated the closure or reorganization of fi rms operating in overcapacity industries that

have experienced 3 consecutive years of losses in 2015 (State Council, 2015). Before

the COVID-19 pandemic, the government stipulated that it would seek to dispose of

zombie enterprises by the end of 2020 (State Council, 2019).

Efforts to mitigate the extent of zombie firms have been weighed against the

authorities’ desire to maintain social stability, particularly employment. The resolution

of zombie fi rms is likely to entail some adjustment costs and may dampen employment

outcomes in the near term.

This paper contributes to the zombie company literature by analyzing the fi rm-level

dynamics behind the high proportion of zombie companies that have recovered from

zombie status amongst listed companies in China. This work builds upon previous work

that has analyzed the life-cycle dynamics of zombie companies in advanced economies

(Banerjee and Hofmann, 2020). The analysis in this paper may offer an interesting

comparison with other studies, which have drawn on data from advanced economies,

given China’s diff ering fi nancial market structure and government approach to dealing

with underperforming businesses.

Examining the dynamics of zombie companies is important to help understand the

nature of the zombie problem. The analysis reveals the firm-level factors influencing

the probability that a firm recovers from zombie status. This paper also assesses the

extent to which the zombifi cation of a fi rm captures the infl uence of transitory factors or

whether there is evidence of longer term scarring eff ects. Further, the paper analyzes the

eff ectiveness of some of the key fi rm-level policy tools used to help zombie companies

recover.

This paper is organized as follows. Section II provides a description of the

literature on zombie companies. Section III describes the key research questions and

methods. Section IV explains the key data used and summary statistics. Section V

presents and analyzes the results. Section VI concludes with a discussion of the policy

implications.