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W. Raphael Lam, Mr. Alfred Schipke, Yuyan Tan, Zhibo Tan, and Mr. James Daniel

I. Introduction Nonviable “zombiefirms have become a key priority of the government in addressing corporate debt vulnerabilities and improving resource allocation in China. 2 Zombie firms account for an increasing share of total corporate debt, operate inefficiently with low productivity, and have crowded out non-zombie investments. Based on firm-level industrial survey data, the study assesses the vulnerabilities of, and potential gains from resolving, these weak firms. This paper extends previous studies ( Tan and others 2017 ; Nie and others 2016

W. Raphael Lam, Mr. Alfred Schipke, Yuyan Tan, and Zhibo Tan
Nonviable “zombie” firms have become a key concern in China. Using novel firm-level industrial survey data, this paper illustrates the central role of zombies and their strong linkages with stateowned enterprises (SOEs) in contributing to debt vulnerabilities and low productivity. As a group, zombie firms and SOEs account for an outsized share of corporate debt, contribute to much of the rise in debt, and face weak fundamentals. Empirical results also show that resolving these weak firms can generate significant gains of 0.7–1.2 percentage points in long-term growth per year. These results also shed light on the ongoing government strategy to tackle these issues by evaluating the effects of different restructuring options. In particular, deleveraging, reducing government subsidies, as well as operational restructuring through divestment and reducing redundancy have significant benefits in restoring corporate performance for zombie firms.