China targets ‘zombies’ with regulatory headshots to kill off subsidised laggards

China’s top market regulator is intensifying its crackdown on debt-laden “zombie companies” – rolling out a pilot programme in seven economic hubs to facilitate the forced exit of unprofitable firms often propped up by government subsidies or bank loans.

With a change to China’s Company Law, the State Administration for Market Regulation and relevant departments can now petition courts for the compulsory liquidation of these walking-dead entities if they fail to voluntarily wind up.

The pilot programme will initially focus on Beijing city and the provinces of Hebei, Jiangsu, Zhejiang, Henan, Sichuan and Guangdong, the regulator announced on Monday.

The initiative is a positive development, said Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at French investment bank Natixis.

“I expect it to be moderately effective for clearing smaller, dormant private firms in the pilot areas and improving market-exit mechanisms,” she said. “However, its broader impact on China’s zombie-company problem is likely to be limited in the short term, as many larger or state-linked zombies continue to be supported by local governments and banks.”