OEF Rapid Review Articles
According to an analysis in the East Asia Forum, one of the structural flaws driving China’s instability is the existance of a investment situation where profits of state-owned enterprises, known as SOEs, are largely privatised to SOE personnel and losses of SOEs are socialised on to the state budget. This results in reckless investment by the SOEs and a complacent willingness by state-owned banks to supply funds for the investments, and is the cause of the large amount of excess capacity in China’s heavy industries today, and also of the serious non-performing loan problem in state-owned banks. The growing presence of “zombie” firms, which are firms that continues to operate despite being unable to service their loans at the market interest rate coincides with the downward trend in the growth of productivity which is the ultimate engine of economic growth. Two main ways have been proposed for solving the zombie firm problem and the excess capacity problem: macro-stimulus and structural reform, but the social pain resulting from such adjustments would have to be addressed.
LINK TO THE SOURCE ARTICLE:
China Has Problem With Zombie Firms
LINK TO THE SOURCE ARTICLE:
China Has Problem With Zombie Firms