Zombie companies in China in the COVID‐19 era

Abstract

AbstractCOVID‐19 poses novel sources of uncertainty and risk to companies, but it also offers many opportunities. In the COVID‐19 era, unprecedented government and central bank interventions to tackle the economic crisis precipitated by the pandemic have reinvigorated the debate on the threat of a zombification of the economy in China, caused by unviable companies being kept alive artificially. This particular consequence of COVID‐19 may aggravate the economic problem of zombie companies in China, increase the risk of further zombification, and create new zombie companies. Recognizing the risk factors of zombie companies and revisiting corporate insolvency law in China, this article aims to address a gap in knowledge related to how zombie companies are being handled in practice in China in the era of the pandemic. In particular, we will investigate the definition, recognition, and uniqueness of zombie companies in the context of COVID‐19, and propose several policy actions, primarily through Chinese insolvency law, to mitigate the risk of the return of zombie companies or a further zombification of the economy. It is anticipated that these measures will help to enhance China's sustainable economic recovery in the wake of the COVID‐19 pandemic.