China to push zombie firms with ‘business value’ to restructure

SHANGHAI/BEIJING (Reuters) – China will encourage “zombie” firms that still retain “business value” to restructure and woo strategic investors to cut debt to reasonable levels, the state planner said on Tuesday.

As part of its efforts to curb soaring corporate debt and tackle price-sapping capacity gluts in sectors such as steel and coal, China has promised to improve bankruptcy procedures and allow vast numbers of loss-making “zombie” companies to close.

But Beijing has also sought to ensure a smooth exit for hundreds of insolvent enterprises in a bid to avoid unemployment and political instability in struggling industrial regions.

“It is necessary to carry out these tasks in an orderly manner, effectively prevent moral hazards such as debt defaults and the loss of state assets, and ensure social stability,” the National Development and Reform Commission (NDRC) said in new guidelines published on its website.

The NDRC ordered local governments to prepare lists of “zombie” firms within three months. The firms will be encouraged to secure agreements with their creditors and draw up restructuring plans within six months.

Firms that meet the conditions for immediate bankruptcy and liquidation will be eliminated, it said.

China set up a 100 billion yuan ($14.6 billion) compensation mechanism in 2016 to help local authorities find alternative employment for laid-off workers after warning that its efforts to streamline its giant but poorly-performing would lead to millions of job losses.

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