Friday, August 28, 2015

Zombie Factories Stalk the Sputtering Chinese Economy

[New York Times] Miao Leijie loses money on each ton of cement his company produces. But stopping production is not an option.
When the plant opened in 2011 to supply the real estate and infrastructure industries in the northern Chinese city of Changzhi, the company raised most of the initial money from banks. Now, Mr. Miao, the factory’s general director, needs to keep churning out cement simply so the company can pay the interest on its loans.
It will be tough for the business, Lucheng Zhuoyue Cement Plant, to get out of the hole. Customers and investments are drying up, and the company is borrowing even more money to stay afloat.
“If we ceased production, the losses would be crushing,” Mr. Miao said, as he chain-smoked in the company’s quiet, spartan office. “We are working for the bank.”
Changzhi and its environs are littered with half-dead cement factories and silent, mothballed plants, an eerie backdrop to the struggling Chinese economy.
Like many industrial cities across China, Changzhi, which expanded aggressively during the country’s long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth.
But rather than shut down, Lucheng Zhuoyue and other Changzhi companies are limping along in a kind of march of the undead.
To protect jobs and plants, the government and its state-owned banks sometimes keep money-losing businesses on life support by rolling over or restructuring loans, providing fresh credit or offering other aid. While this may seem like an odd business tactic, it is part of a broader strategy to help maintain social stability, a major goal of China’s leadership. Authorities in China’s provinces and cities also back struggling factories just because they are deemed important to the local economy.
Similar strategies have been tried before, with little success. In Japan, such businesses, known as “zombie companies,” are blamed for contributing to that country’s two decades of economic stagnation.
As China allows its own “zombies” to stalk the economy, the situation is clouding the country’s outlook, making it difficult to predict where growth is headed. If the leadership doesn’t address the underlying problem, the economic weakness could be prolonged.
Concerns have already been rising that China’s slowdown is worsening and its problems are becoming harder to overcome. Such fears helped ignite a dramatic sell-off on stock markets around the world. Shares on the Shanghai stock exchange have tumbled by more than third since the June high.
“Global investors have now come to realize that China’s travails are beginning to affect everyone,” said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong. Read More