China’s “Zombie Companies” Could Slow Economic Growth For Years To Come, Commerzbank Warns

China’s state-owned banks will support its highly indebted companies, and thus avoid a recession, however, Japan shows that keeping many seemingly “dead companies” (or “zombies”) afloat weighs on the long-term growth prospects of a country, of which China is unlikely to quickly recover, Commerzbank says.

The Chinese government attaches at least as much importance to social stability as the Japanese government did 25 years ago and is also likely to advise its banks to support large companies in financial difficulties, says Commerzbank.

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This will weigh on China’s long-term economic growth for the following three reasons, the bank notes:

• Firstly, seemingly “dead companies” with their low profits invest little and barely recruit more staff. Chinese industrial enterprises have already generated less profit since the beginning of the year versus the same period last year.
• Secondly, companies that are kept “artificially alive” often defend their market shares by offering their products at below cost. Through this price dumping, they also depress the profits of healthy companies, which hinders their economic development. 
• Thirdly, many healthy companies that have not obtained sufficient loans from the state-owned banks have to turn to shadow banks and pay higher borrowing costs. The percentage of shadow banks in total borrowings has already risen at a disproportionately high rate in past years. 

The Chinese economy will not stagnate for ten years as in the case of Japan as per capita income in China is much lower than in Japan in the 1990’s, and the economic catch-up phase is far from over. However, a “zombification” could slow China’s economic growth for years to come. In any event, China will not recover quickly, unlike the Asian tiger economies after the cleansing storm of the Asian financial crisis in 1997-1998, the bank warns.

A survey from Bloomberg in August shows that China’s economy may have only expanded 6.3 percent in the first half of 2015 and growth for the entire year may only register at a 6.6 percent clip, versus the official “about 7 percent�? growth target for 2015 that China’s government has set forth, which is continuing to increase pressure on authorities to do more to meet Premier Li Keqiang’s target.

A full-year growth rate of 7 percent would be China’s slowest annual rate of expansion in 25 years.