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The march of the zombies

China’s huge exports of industrial goods are flooding markets everywhere, contributing to deflationary pressures and threatening producers worldwide.

China’s surplus capacity in steelmaking, for example, is bigger than the entire steel production of Japan, America and Germany combined. Rhodium Group, a consulting firm, calculates that global steel production rose by 57% in the decade to 2014, and Chinese mills accounted for 91% of this increase. In industry after industry, from paper to ships to glass, the picture is the same: China now has far too much supply in the face of shrinking internal demand. Yet still the expansion continues: China’s aluminium-smelting capacity is set to rise by another tenth this year and around two billion tonnes of gross new capacity in coal mining will open in China in the next two years.

China’s grotesque overinvestment in industrial goods is a very big problem. This binge has left many state-owned firms vulnerable to slowdown, turning them into profitless zombies.

Chinese industrial firms last year posted their first annual decline in aggregate profits since 2000. Returns on assets of state firms, which dominate heavy industry, are a third those seen at private firms, and half those of foreign-owned firms in China.

The roots of this mess lie in China’s response to the financial crisis in 2008. Officials subsidize money indiscriminately at state firms in infrastructure and heavy industry. The resulting overcapacity creates even bigger headaches for China than for the rest of the world.

The good news is that the Chinese have publicly recognized there is a problem. The bad news is that three of the tacks they are trying only make things worse.

One option is for China’s zombies to export their overcapacity. But even if the Chinese keep their promises not to devalue the yuan further, the flood of cheap goods onto foreign markets has already exacerbated trade frictions. Another approach is to keep stimulating domestic demand with credit. But borrowing more as profits dive will only worsen the eventual reckoning for zombie firms. A third policy is to encourage consolidation among state firms. Some mergers have happened—in areas such as shipping and rail equipment. But there is little evidence of capacity being taken out as a result.

Chinese leaders are dancing around the obvious solutions—stopping the flow of cheap credit and subsidized water and energy to state firms; making them pay proper dividends rather than using any spare cash to expand further; and, above all, closing down unviable firms.

The Economist, February 27^th, 2016

Useful terms and expressions

• to flood – наводнить, захлестнуть, хлынуть потоком

• deflationary pressure – дефляционное давление

• surplus capacity – избыток производственных мощностей

• binge – бум, разгул, резкий рост

• aggregate profit – суммарная, совокупная прибыль

• return on assets – рентабельность, доходность активов

• to subsidize - финансировать

• indiscriminately – беспорядочно, без разбора, все без исключения

• heavy industry – тяжелая промышленность

ant. light industry - легкая промышленность

• to devalue – обесценивать, девальвировать

• to exacerbate - усугубить, обострить

• trade frictions – торговые разногласия

• reckoning – расплата, расчет

• consolidation – объединение, консолидация

• unviable – нерентабельный, неэффективный, нежизнеспособный

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