Comments by Vu Quoc Huy, on Zombie Firms and the Crowding-Out of Private Investment in China

Vu Quoc Huy: Zombie firms—those insolvent in technical terms but that continue to stay in operation because of different forms of support subsidies (mostly by the state directly or indirectly)—exist in many countries and for a long time. There are many reasons why these zombie firms are alive (Fukuda and Nakamura 2010; Gropp, Guettler, and Saadi 2015). Questions are often asked about what the economic and social costs of keeping these firms alive are, and what would be a reasonable exit strategy for these firms. In China, the issue of zombie firms is even more important, complicated, and multidimensional. The collapse of zombie firms may have serious unintended consequences for displaced workers and contagion effects on other firms and lending institutions, causing systemic failure that the government would like to avoid. The paper addresses this important and highly policy-relevant issue, using a large data set of Chinese enterprises...