Chinese Zombie Companies Must Die

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• published: 13 Mar 2016
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http://profitabletradingtips.com/profitable-trading-tips/chinese-zombie-companies-must-die Chinese Zombie Companies Must Die By www.ProfitableTradingTips.com China needs to undergo structural economic reforms as its economy slows. As so-called managed capitalism gives way to the real thing Chinese zombie companies must die according to an article in Bloomberg Business. China private firms are showing how to get out of the debt trap that ensnares many giant state run companies, the zombies. China’s private companies are doing a better job than state-owned peers cutting debt, new research shows, adding to calls for President Xi Jinping to overhaul the country’s industrial sector ahead of annual legislative meetings in Beijing. Private companies have cut debt to 53 percent of assets from 58 percent in 2007, while SOEs [State Operated Enterprises] have seen those figures jump to 62 percent from 55 percent, according to estimates from Shi Kang, an associate economics professor at the Chinese University of Hong Kong who has served as a visiting scholar at the People’s Bank of China. About 40 percent of bank loans to companies go to SOEs, which only contribute to around 10 percent of the nation’s economic output, according to Nomura Holdings Inc. “The Chinese government must cut implicit guarantees for state-owned companies," said Shi, lead writer of a yet-to-be-published research paper titled "Excess Liquidity and Credit Misallocation: Evidence from China." "With that removed, lenders will no longer treat SOEs favorably. SOEs have to reduce overcapacity and zombie companies must die.” Entrenched political interests are keeping many state operated companies alive when they would have gone out of business in North America, Europe or Japan. China will be successful in its efforts to reform its economy to the extent that it lets so-called zombie state run enterprises live or die on their own merits. The Trap of Managed Economies There is an extended period at the beginning when an economy does better with a heavy hand of central management. Russia converted itself from an agricultural society to a military and technological powerhouse over four decades. Japan, Taiwan and South Korea all prospered with strong central management for decades. China was the wonder of the world as it applied managed capitalism to an economy with lots of cheap labor and foreign investment. The countries that moved to a less managed and more market driven economy at the critical moment did and are doing well. Japan, Taiwan and South Korea have moved to modern sustainable economies that are competitive in today’s world. Russia fell apart at the end of the 1980’s and China is in trouble today both because there comes a time when central management does not work. Last fall we wrote about trading a Chinese economic slowdown. The Chinese economy has grown dramatically for four decades, commonly in double digits year after year. This growth has been based on investment in industrial production, a weak currency and affluent buyers in North America and Europe. Now, as Europe struggles to get back on its feet and the USA is slowly recovering the markets for Chinese goods is not keeping up with the pace of Chinese factory building. China needs to convert from an export driven economy to one driven by internal markets. And they need to quit lending money for more and more construction of factories that are not productive and whole cities that are virtually empty. The result will be a slower growing economy and a lower demand for raw materials from countries like Australia and Brazil. The price of oil is likely to stay low for years as the second largest consumer in the world cuts back. So long as China continues to subsidize state owned and Communist crony-run enterprises its economy will continue to slow and the effects will be felt across the world. Chinese zombie companies must die in order for mainland China to convert from its failing managed capitalism to a more pluralistic and consumer driven economy. https://youtu.be/b-GyOLPFb-M