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Sunday Papers

The Sunday Paper – Resolving China’s Zombies: Tackling Debt and Raising Productivity

The IMF and China have enjoyed a cozy relationship for some time; the former providing strategic road-maps the latter seem to like following. Papers from the IMF therefore on the subject of China should be read closely because they’re often policy-action harbingers

The Working Paper highlighted today was published last November and it’s authorship gives away it’s pedigree. W. Raphael Lam and Alfred Schipke are IMF staffers but they’ve had help from Yuyan Tan and Zhilo Tan from the State Administration of Foreign Exchange and Fudan University respectively.

The paper suggests a jump-start to the SOE and Zombie issue is overdue. The government had a serious crack at this at the end of the last century and early this but since then progress has stopped and, as far as contributing to the corporate debt problem is concerned, it’s gotten worse. SOEs in aggregate now account for between 15%~20% of China’s output and employment but for 57% of corporate debt.

Moreover, among the 57-economies the IMF surveys China is only a middling player when it comes to productivity. Jumping to the top quartile would produce significant economic benefits and the paper suggests half of this gain could be achieved by resolving the zombie issue.

So what’s the cure? Deleverage, privatize, slim work forces and broker asset sales or injections. These measures are not Washington-Consensus-type ideas that work fine in theory but less reliably in practice. They are a prescription many Chinese companies have already followed and done well by. So what’s the prize? The paper concludes resolving this issue would add anywhere from 0.7% to 1.2% extra growth per annum; and who wouldn’t want that?

China claims to be on the case and has identified 9,000 official zombies, around 20% of which it says it has recovered. However, since no details have been provided to substantiate the claim how do we know it’s correct? [It’s almost certainly not.]

If I’m right about this paper being a re-engagement heads-up the next couple of years could be very exciting. More for China Inc. than many SOE managers perhaps?

The paper is a well written and easily digestible 16-pages (that’s where the text finishes and the ‘References’ begin, it’s 26-pages in all) and you can find it by following this link Resolving China’s Zombies.

Happy Sunday.

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