I tend to be very skeptical of comparisons between post-1990 Japan and post-2021 China, because there are just so many differences between the two economies (and between the global economic environments at the time). <\/p>\n
Their industrial policies are different, their trading relationships are different, their bubbles and busts happened for very different reasons and so on. But in the case of \u201czombie\u201d companies, there may be some important parallels.<\/p>\n
What\u2019s important about Daiei is not how it failed, but\u00a0why it didn\u2019t fail much sooner. Caballero, Hoshi, and Kashyap\u00a0wrote a paper in 2008<\/a>\u00a0arguing that \u201czombie\u201d companies like Daiei held the Japanese economy back during the 1990s (and, in some cases, even beyond the 1990s).<\/p>\n The basic story is that after 1990, the Japanese economy slowed down, and lots of companies that used to be profitable \u2014 especially in the construction, retail,and trading sectors \u2014 were no longer profitable. These companies owed a lot of money to banks. <\/p>\n If they stopped being able to pay back their loans, the banks would be forced to recognize\u00a0bad debt\u00a0on their books. This would get them in trouble with regulators (because of capital requirements), and it would also get them in trouble with the Japanese public.<\/p>\n So what the banks did was to lend\u00a0even more\u00a0money to the failing companies that already owed them a lot of money, at very cheap interest rates. The new loans were used to pay back the old loans, and the new loans would be classified on the bank\u2019s books as \u201cgood\u201d debt. This process \u2014 known as \u201cevergreening\u201d \u2014 kept banks from ever having to acknowledge their losses:<\/p>\n Peek and Rosengren (2005)<\/a>\u00a0document this empirically as well.<\/p>\n Evergreening kept a bunch of companies afloat \u2014 like Daiei \u2014 that had utterly broken business models. Theoretically, the companies could have eventually pivoted their business models and recovered, or Japan\u2019s economy could have started booming again, etc. In practice, this never happened.<\/p>\n Caballero, Hoshi and Kashyap argue that evergreening was very bad for the Japanese economy, because it hoovered up scarce resources that better companies could have used to grow. With all of those crappy loans clogging up their books, Japanese banks couldn\u2019t lend to healthier companies. <\/p>\n With big zombies like Daiei still able to employ large amounts of Japan\u2019s best managers, young scrappy upstarts were deprived of talent. The authors argue that keeping all of this labor and capital locked up inside doomed companies contributed significantly to Japan\u2019s long productivity stagnation.<\/p>\n Why did the Japanese government allow this to happen? Preserving employment at the zombie companies was probably a big part of it. Japan had a strong tradition of job security at that point in time, and to throw so many people out of work \u2014 even if they could have gotten new jobs eventually \u2014 would have been seen as cruel and unfair. <\/p>\n Social unrest was a possibility. Bank bailouts may also have been deeply politically unpopular. In any case, whatever the reason, throughout the 1990s the government supported banks with various capital injections and regulatory forbearance, without forcing banks to cut off the zombies.<\/p>\n Anyway, that\u2019s Japan. The question is whether something like this will happen in China.<\/p>\n China\u2019s experience with its real estate bubble and bust doesn\u2019t exactly parallel Japan\u2019s, but there are some broad similarities. Since 2021, there has been a broad economic slowdown (probably\u00a0more severe<\/a>\u00a0than the official numbers suggest), and a long-lasting chill in real-estate-related industries. This has predictably led to a rise in the number of loss-making companies:<\/p>\n You\u2019ll notice on this chart that the share of non-performing loans has actually gone\u00a0down\u00a0since 2021, even as fewer companies are turning a profit. That suggests that lots of Chinese companies are being kept on life support by cheap bank loans. Here\u2019s the Rhodium Group:<\/p>\n Some concrete data points suggest that China\u2019s evergreening of debt is more widespread than is commonly the case in most market economies. The ratio of banks\u2019 reported non-performing loans has decreased over the past years, while the share of loss-making enterprises increased\u2026This would indicate Chinese banks have been sitting on large volumes of NPLs that have not yet been fully recognized. This is an open secret: The National Audit Office recently claimed in an annual audit report to the NPC that 16 of 43 audited banks last year had NPL levels that were double the officially reported figure\u2026<\/p>\n Loan rollovers are a pervasive phenomenon in China\u2026[T]he financial system\u2026served as a shock absorber, channeling resources to enterprises facing losses to maintain output and prevent the defaults and bankruptcies that occurred in market economies.<\/p>\n<\/blockquote>\n Another Rhodium report<\/a>\u00a0finds that the proportion of loans made below benchmark rates has risen significantly since 2021, even though benchmark rates are lower than they were back then:<\/p>\n And the Dallas Fed has documented how more and more Chinese companies, especially in the real estate sector, aren\u2019t making enough money to pay the interest on their loans:<\/p>\n All this \u2014 falling official NPLs, much more below-market lending, companies unable to pay their interest expenses, widespread suspicion that many of the companies whose loans are \u201cperforming\u201d will never be able to repay those loans \u2014 matches the general pattern that\u00a0Hoshi and Kashyap (2000)<\/a>\u00a0documented in post-bubble Japan. Banks have taken a bunch of losses, but have refused to recognize those losses, using a flood of cheap debt to keep their borrowers afloat.<\/p>\n A bunch of people have warned about this. Here\u2019s Rhodium:<\/p>\n Because of the political incentives shaping China\u2019s financial system, banks in China tend to extend or roll over debt to poorly performing or loss-making companies. This can have some of the same effects as a subsidy, by removing incentives for companies to stay profitable and isolating them from market forces that would otherwise lead to their restructuring or bankruptcy\u2026.Evergreening of credit, therefore, allows firms to\u2026[reduce] domestic and global prices to unprofitable levels[.]<\/p>\n<\/blockquote>\n And here\u2019s the Dallas Fed:<\/p>\n There is mounting evidence of \u201czombie lending\u201d in China, banks rolling over bad loans to unprofitable firms and allowing the status quo to continue rather than recognize losses.<\/p>\n<\/blockquote>\n And here\u2019s\u00a0a Business Times story<\/a>\u00a0about how China\u2019s government has allowed and even encouraged zombification, much as Japan did in the 1990s:<\/p>\n It\u2019s impossible to quantify the true extent of the [bad debt] problem, though most economists say the ratio of bad loans is significantly higher than the 1.5 per cent official rate\u2026One analyst at Absolute Strategy Research in London pegs it at about 10 per cent\u2026Others say it could be double that amount\u2026<\/p>\n While the [banks\u2019] leniency [toward borrowers], largely condoned by regulators in Beijing, has helped maintain financial stability over the past few years, it also means the banking system is recycling capital into unproductive companies rather than spurring real growth in healthy firms\u2026<\/p>\n [Government] officials have moved to bolster the nation\u2019s six biggest banks with more than US$100 billion in fresh capital\u2026[R]ather than cracking down on deadbeat borrowers, China\u2019s banks are encouraged to cut them some slack. Regulators have for years urged the big banks to keep their reported bad loan ratio under 2 per cent, according to sources familiar with the guidance\u2026As a result, banks routinely roll over maturing loans, extend repayment periods, or allow interest to be capitalised to avoid triggering NPL recognition.<\/p>\n<\/blockquote>\n Now you might be tempted to think \u2014 and I\u2019ve seen a few people argue \u2014 that this only matters in a\u00a0market\u00a0economy. In a market economy, undercapitalized banks matter because banks have to succeed or fail on their own. <\/p>\n In a\u00a0state-directed\u00a0economy like China\u2019s, the theory goes, debt on the banks\u2019 books might as well be on the government\u2019s books.1<\/a>\u00a0Banks can keep lending no matter how much bad debt they have, because the only entity that could punish them \u2014 the Chinese government \u2014 wants them to do so.<\/p>\n But while government control might avert a financial crisis, it doesn\u2019t automatically solve the zombie problem, or make the comparison with Japan inappropriate.<\/p>\n First of all, it would be a mistake to see Japan\u2019s government in the 1990s as operating at arm\u2019s length from Japanese banks. It most certainly did not; in fact,\u00a0it acted to\u00a0support<\/a>\u00a0<\/a>the banks<\/a>\u00a0that were supporting the zombies. <\/p>\n The government bailed out the banks, deliberately turned a blind eye to the zombie problem, and encouraged banks to keep on lending to healthier companies despite the unrecognized bad loans on their books. That\u2019s not\u00a0too\u00a0different from what China\u2019s government\u00a0seems to have done<\/a>\u00a0in response to the real estate bust, at least initially.<\/p>\n But simply having the government urge (or order) banks to keep lending didn\u2019t solve the zombie problem in Japan, and it won\u2019t solve it in China either. Even if the zombie companies don\u2019t end up competing with healthier companies for\u00a0capital, they compete with them for other resources. <\/p>\n They compete for\u00a0labor\u00a0\u2014 workers who could be working at young, growing, healthy companies are instead being paid to continue to work for unproductive companies that are just spinning their wheels. They also compete for raw materials, for land, for energy, and so on.<\/p>\n These resources are not in infinite supply, even in China. As long as unproductive zombie companies are hiring workers, hoovering up metals and chemicals and watts of electricity, and taking up prime real estate, they\u2019re holding back the rest of the economy. This doesn\u2019t just manifest as higher costs for healthy companies \u2014 it also shows up as increased competition. <\/p>\n In 1990s Japan, if a new retailer wanted to enter the scene, it had to compete with Daiei, the unproductive behemoth that was essentially being paid by banks to produce below cost. The same will be true in China.<\/p>\n In fact, this may be a reason for the \u201cinvolution\u201d that Chinese companies are experiencing. In the wake of the real estate bust, China\u2019s government directed banks to lend to manufacturing companies instead of to real estate-related companies. <\/p>\n They did this (though some of the loans ended up sneaking back into the real estate sector). In fact, a large percent of\u00a0the \u201csubsidies\u201d<\/a>\u00a0that China dishes out to its manufacturing companies is\u00a0through below-market-rate loans<\/a>.<\/p>\n Some of these manufacturing companies will be successful and efficient \u2014 indeed, many already have been. But others are unproductive and inefficient. Instead of letting these die, China\u2019s banks may keep them on as zombies as well,\u00a0paying them to compete<\/a>\u00a0with China\u2019s healthier companies. Here\u2019s\u00a0Alicia Garcia-Herrero<\/a>\u00a0from back in March:<\/p>\n In many sectors, including\u2026electric vehicles, solar panels, batteries, and other green technologies\u2026Chinese firms\u2026keep selling at rock-bottom levels, sometimes below what it costs to produce, just to hold onto market share. A growing number of these companies cannot earn enough revenue to even service their debt\u2026<\/p>\n These \u201czombie\u201d companies survive only because banks roll over loans and local governments provide subsidies to avoid job losses and keep tax revenues flowing\u2026In newer, high-priority sectors like green tech, the share of zombie companies has hit 30 percent of total listed companies\u2026<\/p>\n Without real productivity advances, [zombies] still join the price-slashing frenzy to stay in the game thanks to external support from banks or local governments. They cut prices aggressively\u2026The outcome is predictable: collapsing profit margins across the board, even for the better companies, whose productivity is increasing.<\/p>\n<\/blockquote>\n When we Westerners think about the effect of Chinese zombification, we often think about\u00a0the flood of cheap exports<\/a>\u00a0threatening to\u00a0deindustrialize Europe\u00a0<\/a>and other regions. But while that export dominance might seem like a victory to China\u2019s mercantilist leaders, it\u2019s a double-edged sword, because zombification reduces productivity at home. In the long run, lower productivity hurts growth, despite the temporary bump from exports.<\/p>\n In other words, China\u2019s fusion between the financial system and the state may have made zombification\u00a0worse, not better. The Chinese state is not a ruthlessly efficient allocator of capital; it has sociopolitical goals just like any other state, and it fears the unrest that could result from widespread corporate failure and unemployment. Yes, it can tell banks to lend to manufacturers instead of property developers, but that just ends up adding\u00a0more\u00a0zombies to the horde.<\/p>\n And at some point, even state-owned and state-directed banks probably do care about profitability. Yes, the government can bail out any bank at will, but if you\u2019re the bank executive or manager who dished out the bad loans and made a bailout necessary, your career might be over. This might be why corporate loans have started to fall slightly from the torrid pace of 2023-24:<\/p>\n Ultimately, when people write the story of China\u2019s economy in the 2020s, zombification could end up being more fundamental to that story than exports. The parallels with Japan are not always real, but they\u2019re real in this case \u2014 and so far, China\u2019s government seems to be walking into a similar trap.<\/p>\n Update<\/strong>: In the comments,\u00a0Jack Lowenstein asks a very important question<\/a>: So what? Even if zombification proceeds in China, what are the downsides from the point of the Chinese government? He writes:<\/p>\n I think the critical difference between Japan\u2019s \u201cextend and pretend\u201d policies and China\u2019s is the geopolitical element.<\/p>\n Japan feared domestic social and political disruption \u2013 and was heavily influenced by \u201cfree market\u201d vested interests. There was also a degree of denial by MOF and METI that the gogo years of the post-war period up to the mid 1980s were really over.<\/p>\n The CCP and the PRC however are driven by the deliberate aim of de industrialization of critical parts of the OECD supply chain. Loans and other support to the companies that will deliver this outcome are not going to stop for economic reasons.<\/p>\n Sadly policy makers in most of the countries suffering these effects are ideologically unwilling to enact anti-dumping and other defenses to respond. So zombification will not stop in China. Yes the population of the PRC will pay a price. But since when did the CCP care about that?<\/p>\n<\/blockquote>\n This is a very important question, and I should have probably gone into that more in the post. Here was\u00a0my response<\/a>\u00a0to Jack in the comments:<\/p>\n I think some of these are real differences, but perhaps not all of them.<\/p>\n \u201cJapan feared domestic social and political disruption\u201d <\u2013 I actually don\u2019t think this is a big difference. China is worried about social and political disruption as well \u2014 just look at how fast Xi ended Zero Covid after some small scattered protests. The old social compact in China was \u201cgrowth in exchange for political quiescence.\u201d But with rapid growth now over, that social compact is gone, so the possibility for unrest is definitely there.<\/p>\n \u201cThere was also a degree of denial by MOF and METI that the gogo years of the post war period up to the mid 1980s were really over.\u201d <\u2013 I\u2019m not sure this is different either. China has been overstating its growth since the bubble burst in 2021 (https:\/\/rhg.com\/research\/chinas-economy-rightsizing-2025-looking-ahead-to-2026\/<\/a>). This is often a tool the government uses to \u201csmooth\u201d growth between good and bad years (https:\/\/www.aeaweb.org\/articles?id=10.1257\/mac.20150074<\/a>), suggesting that they think fast growth might come back.<\/p>\n \u201cThe CCP and the PRC however are driven by the deliberate aim of de industrialization of critical parts of the OECD supply chain. Loans and other support to the companies that will deliver this outcome are not going to stop for economic reasons.\u201d <\u2013 This is true, and I think this is an argument FOR zombification. Unproductive, unprofitable companies that fill supply chain gaps will continue to be supported with evergreened loans.<\/p>\n So the question becomes: What are the downsides of zombification from the regime\u2019s perspective? That\u2019s a topic I should have considered more. One answer is \u201csocial unrest\u201d \u2014 if slow growth makes the repressiveness of China\u2019s regime less tolerable, then we could see popular anger at the industrial-policy regime. Remember that Japan was a very free society, where people could pivot from the pursuit of money to the pursuit of lifestyle and art and leisure. That\u2019s not necessarily true in China.<\/p>\n Another possibility is that eventually China becomes more like the USSR. The USSR was famously unproductive, because it insisted on onshoring its entire supply chain. Right now, China looks hyper-competitive in a bunch of high-tech industries, but if zombies suck up more and more labor and other resources (including compute), that competitiveness could narrow over time.<\/p>\n Finally, there are fiscal dangers (https:\/\/rhg.com\/research\/chinas-financial-and-fiscal-decay\/<\/a>). When Europeans buy cheap Chinese EVs, part of the consumer surplus they receive comes out of the pockets of Chinese taxpayers and bondholders. Japan\u2019s zombification caused it to run up an enormous amount of debt, which it was able to carry safely only thanks to A) persistently low demand and low natural interest rates, and B) the government\u2019s ability to buy overseas assets that performed extremely well (https:\/\/www.ft.com\/content\/f7d3f20c-b303-4f6c-b4a0-8ee8906ae155<\/a>). Now that the first of those has gone away, Japan\u2019s government debt IS becoming a problem, with a plunging exchange rate and creeping inflation.<\/p>\n So while China\u2019s government can get away with \u201cdamn the economics, full speed ahead\u201d for a while, eventually I think something breaks\u2026<\/p>\n<\/blockquote>\n Notes<\/p>\n 1<\/a> And since that debt is owed almost entirely domestically, the theory says that the debt doesn\u2019t really matter in a macroeconomic sense; it\u2019s just some Chinese people owing money to other Chinese people.<\/p>\n This\u00a0article<\/a>\u00a0was first published on Noah Smith\u2019s Noahpinion\u00a0Substack and is republished with kind permission. Become a Noahopinion\u00a0subscriber<\/a>\u00a0here.<\/p>\n","protected":false},"excerpt":{"rendered":"The photo above is not from China; it\u2019s from Japan. In the 1970s, Daiei was Japan\u2019s top retailer.…\n","protected":false},"author":2,"featured_media":538514,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[174],"tags":[38936,79,2706,231327,164466,231328,231329,231330,179,18,19,17,231331,128826],"class_list":["post-538513","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-block-3","tag-business","tag-china-economy","tag-china-npls","tag-china-overcapacity","tag-china-subsidies","tag-china-zombie-companies","tag-daiei","tag-economy","tag-eire","tag-ie","tag-ireland","tag-japan-zombie-companies","tag-rhodium-group"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@ie\/116761407093692404","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/538513","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=538513"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/538513\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/538514"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=538513"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=538513"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=538513"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"\/](\"https:\/\/www.europesays.com\/ie\/wp-content\/uploads\/2026\/06\/https:\/\/substack-post-media.s3.amazonaws.com\/public\/images\/887e06cf-bd5a-44a7-886a-a999cf664039_673x.jpeg\")
<\/a>Source:\u00a0Caballero et al. (2008)<\/a><\/p>\n![\"\"\/](\"https:\/\/www.europesays.com\/ie\/wp-content\/uploads\/2026\/06\/https:\/\/substack-post-media.s3.amazonaws.com\/public\/images\/4830436b-9556-4ac6-ab49-34d5c19c6df1_1077.jpeg\")
<\/a>Source:\u00a0Rhodium Group<\/a><\/p>\n\n
![\"\"\/](\"https:\/\/www.europesays.com\/ie\/wp-content\/uploads\/2026\/06\/https:\/\/substack-post-media.s3.amazonaws.com\/public\/images\/e18d3d03-be08-48fa-88d7-1df291da73d4_1241.jpeg\")
<\/a>Source:\u00a0Rhodium Group<\/a><\/p>\n![\"\"\/](\"https:\/\/www.europesays.com\/ie\/wp-content\/uploads\/2026\/06\/https:\/\/substack-post-media.s3.amazonaws.com\/public\/images\/d8f37a2f-6c10-4d71-a957-6772463233df_997x.jpeg\")
<\/a>Source:\u00a0Dallas Fed<\/a><\/p>\n\n
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![\"\"\/](\"https:\/\/www.europesays.com\/ie\/wp-content\/uploads\/2026\/06\/https:\/\/substack-post-media.s3.amazonaws.com\/public\/images\/3e381f90-5772-4852-917c-b36d9cb6f566_989x.jpeg\")
<\/a>Source:\u00a0Rhodium Group<\/a><\/p>\n\n
\n