Major measures to cut zombie firms

Notice calls for first lists of companies in 3 months, process to finish in 2020

China is ramping up efforts to deal with zombie companies through bankruptcy or restructuring, as it seeks to cut overcapacity and guard against risks, according to the nation's top economic regulator.

Several government departments jointly issued a notice on Tuesday, urging local governments and State-owned asset management departments to define the first lists of zombie companies in three months. The disposal of zombie companies is set to be completed by 2020.

More efforts are needed to further clarify the procedures for the transfer of State-owned assets, improve the efficiency of the government approval process, improve the rules for disposing of zombie firms' collateral and ensure the active use of zombie companies' existing assets to pay off their debts, according to the notice.

The statement, issued by the National Development of Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance and other departments, shows China's firm determination to root out zombie companies, which do not generate enough revenue to repay their debts and have haunted the nation's industrial heartland during the past years.

Specifically, the statement defines three types of zombie companies' debts and offers different ways to deal with them.

First, based on zombie enterprises' business value, the possibility of debt redemption and other factors, the government should use bankruptcy liquidation, bankruptcy reorganization, debt restructuring and mergers and acquisitions to dispose of debt with a clear debtor-creditor relationship.

Second, other forms of debt need to be clarified, allowing related firms and creditors to negotiate independently and then define the debts actually used for zombie firms.

Third, guaranteed debts should be disposed of independently by firms and creditors.

The central government has yet to publish a definition of zombie factories, "but there will be a definition. Local governments know very well which companies are poorly operating zombie factories－because they have been kept running with the help of local governments' special assistance. It is necessary to collect their names," said an official with the National Development and Reform Commission who declined to be identified.

A document on dealing with enterprises' bad debts and overcapacity cuts jointly drafted by the NDRC and the China Banking and Insurance Regulatory Commission is expected to be rolled out soon, according to Zhang Jingsong, deputy head of the regulation department with the CBIRC.