Zombie companies in China in the COVID‐19 era

• Published date: 01 June 2023
• Author: Jingchen Zhao,Chuyi Wei
• Date: 01 June 2023
• DOI: http://doi.org/10.1002/iir.1501

RESEARCH ARTICLE

Zombie companies in China in the

COVID-19 era

Jingchen Zhao

1,2

| Chuyi Wei

3

1

School of Law, Guangdong University

of Finance and Economics,

Guangzhou, China

2

Nottingham Law School, Nottingham

Trent University, Nottingham, UK

3

School of Law, Jinan University,

Guangzhou, China

Correspondence

Chuyi Wei, School of Law, Jinan

University, Guangzhou 510630, China.

Email: weichuyiluna@hotmail.com

Abstract

COVID-19 poses novel sources of uncertainty and risk

to companies, but it also offers many opportunities. In

the COVID-19 era, unprecedented government and

central bank interventions to tackle the economic crisis

precipitated by the pandemic have reinvigorated the

debate on the threat of a zombification of the economy

in China, caused by unviable companies being kept

alive artificially. This particular consequence of

COVID-19 may aggravate the economic problem of

zombie companies in China, increase the risk of further

zombification, and create new zombie companies. Rec-

ognizing the risk factors of zombie companies and rev-

isiting corporate insolvency law in China, this article

aims to address a gap in knowledge related to how

zombie companies are being handled in practice in

China in the era of the pandemic. In particular, we will

investigate the definition, recognition, and uniqueness

of zombie companies in the context of COVID-19, and

propose several policy actions, primarily through Chi-

nese insolvency law, to mitigate the risk of the return

of zombie companies or a further zombification of the

economy. It is anticipated that these measures will help

to enhance China's sustainable economic recovery in

the wake of the COVID-19 pandemic.

Received: 15 February 2023 Revised: 9 May 2023 Accepted: 5 July 2023

DOI: 10.1002/iir.1501

© 2023 INSOL International and John Wiley & Sons Ltd.

Int Insolv Rev. 2023;32:309–335. wileyonlinelibrary.com/journal/iir 309

1|INTRODUCTION

Diane Swonk, the chief economist at Grant Thornton, has claimed that the spread of the coro-

navirus developed into an “economic pandemic.”

1

However, the COVID-19 pandemic not only

brought challenges but also created opportunities for companies and governments to consider

the appropriateness and effectiveness of their existing policies and regulations. Government

officials and business leaders hoped that the measures to contain the virus would slow the

spread of infection and minimize the negative impact brought by the pandemic, but there was

also an inevitable need to introduce and implement a range of relief and support measures for

companies that suffered from the effects of the pandemic. These measures often took the form

of grants (i.e., direct transfers to eligible companies), debt moratoria, favorable loan schemes,

public guarantee loan programs, accommodatory credit conditions,or a loosening of micro- and

macroprudential supervisory rules.

Although companies may have temporarily benefited from these approaches, it has been

suggested that these measures might also have further exacerbated the zombification of poorly-

performing companies, which would go on to struggle in the face of stricter eligibility criteria

for schemes and more recognition of credit risk in debt and loan pricing after the abolition of

the temporary measures.

2

Although they did keep cash-strapped economies afloat, these mea-

sures may in fact have contributed to the “zombification”of those economies.

3

Zombie companies are mature companies that are:

heavily indebted, chronically unprofitable, and have no way of repaying their loans

over a long period.

4

Zombie companies are always characterized by persistent losses, low returns, and inefficient

operations, yet many of them still manage to stay alive. Zombie companies in the US have accu-

mulated USD 1.4 trillion in debt, while some Swiss-based liquidators have had to ramp up hir-

ing to cope with the growing number of zombie companies and the impending wave of

insolvencies.

5

This article investigates the issues around regulating zombie companies in

response to the challenges brought by COVID-19, aiming to address a gap in knowledge related

to how zombie companies are being handled in practice in the era of COVID-19 and using

China as an example.

Zombie companies are not a recent phenomenon in China. Known as Jiangshi Qiye, they

are a legacy of China's planned economy and the government's subsequent administrative

approach to the socialist market economy, which has been beset by inefficiencies and overca-

pacity. Although dealing with zombie companies is often regarded as a task for insolvency law,

in China, a more cautious approach has been necessitated by the socially important role that

many of them play.

The current literature has been overwhelmingly negative regarding the existence of zombie

companies in China, commenting that they crowd out other, more profitable companies by tak-

ing up finite resources and thus reducing the overall productivity of the economy.

6

In China

specifically, government aid in the form of subsidies creates a “resource mismatch,”which

impacts the long-term development of the economy by crowding out healthy firms that may

have superior business conditions and higher production efficiency.

Initially, the Chinese government preferred administrative approaches such as mergers or

revoking business licenses as ways to handle the affairs of these companies. In the longer term,

310 ZHAO and WEI