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A Dawn for the Dead Companies of China

Jul 25, 2016 | 09:00 GMT
A Dawn for the Dead Companies of China
China is grappling with how to handle unprofitable industries, many of them state-owned, that keep employment numbers up but threaten the nation's macroeconomic stability.
(Kevin Frayer/Getty Images)

China is battling a ghastly economic problem. For months, the country's so-called zombie corporations -- failing, mostly state-controlled companies -- have been teetering on the brink of bankruptcy, caught among high and rising levels of debt, ballooning debt-servicing costs and slim or nonexistent profits. In response, China's State Council released a statement July 18 describing a possible pilot program to enable indebted corporations to convert some of their outstanding debts to equities held by Chinese banks. On its own, a corporate debt-to-equity swap would do little to reform these companies into productive and profitable businesses, a key requirement if China is to "rebalance" to a more sustainable growth model. Even so, it would help lower the businesses' debt burden in the short term. For Beijing, bound as it is by the need to maintain employment and, in turn, social stability, that may be enough to stave off a crisis for...

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