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Li Wei (Beihang University) - Zombie Firms and Misallocation in China

Date and Time: March 27th, 2018, 9:00 - 11:00 am

Room: A 101 in the Economics Building (Museum)

Abstract

This paper revisits and refines the definition of zombie firms in China from manufacturing sector. These statified zombie firms are heavily indebted, strongly linked with state ownership, with a higher inventory-to-output ratio. Based on China Industrial Census Survey, this study documents the evidence suggesting a trade-off between misallocation and stimulation economic policies. China implemented an enormous monetary expansion for the post-2008 periods. It shwos the number and the magnitude of undesirable zombie firms increased sharply since then.

Then, by looking into the different responses of zombie firms and non-zombie firms to identified monetary shocks in China, we study the effectiveness of China’s monetary policy per the presence of zombie firms. We find that: (1) a small fraction of zombies firms disproportionately benefit from expansionary monetary shocks and accommodate most of the intended effects of monetary easing; (2) a rise in the industry zombie is associated with lower credit access and investment rate for non-zombie firms, a larger TFP gap between zombie and non-zombie firms and less productivity-enhancing capital reallocation. This paper also provides a general equilibrium model for the first time to describe the dynamics of zombie firms share and the distortionary systematic insolvency risk from zombie firms.

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