The Chinese government has long supported growth in heavy industry with subsidies and other incentives. But now, as the economy looks to balance towards a more diverse mix of industry and services, the government is doing more to aid the transition. Recently, a fund to spur growth in service-oriented businesses was established, and although a majority of the money came from foreign investors,
this is still a step in the right direction.
When Professor Murphree came and spoke, we heard about rising labor costs and the slowing pace of Chinese manufacturing. As the economy grows, workers are paid more and more, resulting in fewer opportunities for the labor arbitrage that helped China’s economy grow so quickly over the past three decades, growth that has recently contributed to global overcapacity in several heavy industries. The government, however, has begun to make greater use of one course of action that had not been used as frequently over the years: bankruptcy. In the past, government funds were used to support failing manufacturing businesses because the political costs of unemployment and layoffs were higher than the financial cost of supporting the companies. Now, however, an increase in bankruptcy cases shows that this model is losing popularity. In 2016, Chinese courts accepted 54% more bankruptcy cases than in 2015, with most resulting in liquidation, likely due to more companies taking on higher loads of debt. This rapid uptick in borrowing and bankruptcy is a pronounced change from past policy, a change that will likely grow in significance over the next few years. Many of the liquidated companies are so-called “zombie firms,” unprofitable manufacturers that have been kept operational by government money. The fact that these firms are losing support may indicate a broader policy shift.
Between increased foreign funding for service industries and bankruptcies reducing the workforce and production capacity of heavy industry, it seems that the government is beginning to pivot its goals for economic growth and look to new sectors to shoulder the burden. Only time will tell if reducing manufacturing employment through bankruptcy will be balanced by growth in other industries, or if this new policy will bring political opposition and unrest.