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EDI TORI AL
ChinaShouldShutDownZombie
BusinessestoHelptheEconomy
ByTHEEDITORIALBOARD
JUNE9,2016
Chinaknowsthatithastoshutdownsteelmills,coalminesandotherindustrial
unitsthatareproducingmuchmoreofjustabouteverythingthantheworld
needs,depressingpricesandhurtingbusinessesandworkerseverywhere.Butthe
governmenthasbeenreluctanttoactforfearofthrowingmillionsoutofwork
anddamagingChinesebanksthathavelentmoneytowhatareessentiallyzombie
businesseskeptalivebygovernmentpolicies.
ThatfearhelpsexplainwhyChineseofficialspushedbackwhentheObama
administrationdemandedduringthisweeksU.S.ChinaStrategicandEconomic
DialoguethatBeijingreduceindustrialcapacity.Americanofficialsneedtokeep
pressingtheissue,notonlybecauseChinaisfloodingglobalmarketswithsteel,
aluminumandothergoods,butalsobecauseChinaislivingafantasythatcan
onlyhurtitsownpeople.
In2008,Chinabeganpumpingtensofbillionsofdollarsintoitseconomy
andencouragedbankstoembarkonalendingspreetooffsettheeffectofthe
financialcrisis.Asaresult,thecountrycontinuedtogrowquickly,evenasother
countriesslidintorecession.Thegovernmentinterventioncameatahighcostas
businesses,manyofthemownedbyprovincialandlocalgovernments,borrowed
excessivelytoinvestinprojectsbasedonunrealisticassumptionsaboutglobal
demand.
TheresultisthatChinanowfacesadebtproblemandanovercapacity
problem.GoldmanSachsestimatesthattheamountofdebtintheChinese
economyjumpedto235percentofgrossdomesticproductin2015,from130
percentin2008.Atitscurrenttrajectory,Goldmananalystssaythatnumber
couldriseto344percentofG.D.P.by2020.
Thebillsforthatdebtandinvestmentbingearenowcomingdue,including
humancoststhatmeritacompassionateresponse.Reducingindustrial
productioncouldforcefivemillionto10millionworkersfromtheirjobs,says
ScottKennedyoftheCenterforStrategicandInternationalStudiesin
Washington.Banksandotherinvestorsmayhavetowriteofforrestructuretens
ofbillionsofdollarsinloansandbonds.
Tohelpaffectedworkers,Chinaneedsastrongersocialsafetynet
retrainingpeopleforjobsintheservicesector,providinggenerouspensionsto
workersclosetoretirementageandrelocatingworkersinhardhitareastocities
andtownswherejobsaremoreplentiful.Increasedspendingonhealthand
educationwouldimprovesocialservicesandcreatejobs.Overall,thesepolicies
shouldmakeiteasierforprovincialandlocalgovernmentstoshutdown
unprofitableenterprises.
Onthefinancialside,Chinaneedsamoreeffectiveprocessforcompaniesto
restructuredebts,mergewithotherbusinessesorliquidatetheirassets.The
currentbankruptcysystemissoinefficientthatmanysmallerbusinessesthatfail
simplydisappearwithoutsettlingtheirdebts.Stateownedbankskeepailing
companies,somegovernmentowned,alivebyrollingovertheirloanssimply
becausemanagersdonotwanttoacknowledgelosses.
Therehavebeensignsofprogressinrecentmonths.Somestateowned
businesseshavedefaultedonbondpayments,suggestingthatthegovernment
willnotpropupfailingcompaniesinperpetuity,whichisencouraging.Butthe
defaultshavealsounnervedinvestors,becausetheycannoteasilyturnto
bankruptcycourtstoswaptheirdebtforequityorrecoupatleastsomeoftheir
moneythroughnegotiationswithmanagement.
PresidentXiJinpingsaysheintendstopushforsupplysidestructural
reformthatwouldreduceexcessindustrialcapacity,cuttaxesandrelax
governmentcontrolovertheeconomy.Thatechoedapromisehemadein2013to
givemarketforcesadecisiveroleintheallocationofresources.Sofar,hehas
notsupportedeithersloganwithmuchsubstance.
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AversionofthiseditorialappearsinprintonJune9,2016,onpageA22oftheNewYorkeditionwith
theheadline:ChinasZombieProblem.
2016TheNewYorkTimesCompany