Eliminating zombie companies through insolvency law in China: striking a balance between market-oriented policies and government intervention

Abstract

Zombie companies emerged in China for economic and social reasons, particularly as a result of earlier expansionary economic policies. Having been kept alive through subsidies for social and political reasons more recently zombie companies have been the target of ambitious elimination policies in China. Local governments have been given targets for zombie company elimination and there have been significant achievements in zombie market exits. Yet an examination of case law reveals limited usage of insolvency laws in the processes used and this is unsurprising given the nascent state of insolvency law and supporting institutions necessitating administrative approaches. In recognising existing limitations this paper advocates the development of a hybrid approach towards zombie company elimination, using market based exit approaches while recognising that administrative approaches are needed to provide social services and an enabling environment for these cases. Using a steel industry case study it considers how a greater role for creditors and independent administrators can aid in market based approaches, as well as improvements to judicial and court capacity to handle insolvency cases.

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