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THE WOLF STREET REPORT: The Zombie Companies Are Coming
THE WOLF STREET REPORT: The Zombie Companies Are Coming
China’s ‘zombie’ companies are a big threat to the economy — and JPMorgan says their debt pile means the country could be slowing faster than anyone thought
China’s ‘zombie’ companies are a big threat to the economy — and JPMorgan says their debt pile means the country could be slowing faster than anyone thought
- China’s economy is beset by huge public and corporate debt problems which threaten to derail the country’s growth story, according to JPMorgan.
- Economic growth in China has been steadily slowing and could get even lower meaning the world’s second largest economy won’t overtake the US any time soon.
- The key risk — disposing of “zombie” state-owned companies — means the economy could be forced to adopt a zero interest policy, JPMorgan said.
The US-China trade war is in more of the headlines, but there’s an even greater problem for the world’s second largest economy.
“The biggest concern regarding financial stability and the sustainability of economic growth has been China’s ballooning debt problem, especially in the co rporate sector,” according to a note published by JPMorgan.
Chinese corporate debt is among the highest in the world — it’s a stunning 162% of GDP.
The country’s debt will take serious and prolonged policy changes to rectify, said the economists led by Chief China economist Haibin Zhu. China’s slowdown comes alongside other economic red flags — from its economy including poor PMI figures, lower exports, an aging workforce, and spiralling household debt.
JPMorgan pushes back on estimates that China will soon overtake the US as the world’s biggest economy, predicting that China’s growth potential will slow from the current 6.5% level to 5.5% in 2021 through 2025 and 4.5% in 2026 through 2030.
“This means that China will remain the second largest economy much longer than expected,” the economists said.
“The transition to slower potential growth could be volatile and requires balancing reforms,” they wrote. “This will reshape China’s role in the global economy.”
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The zombie apocalypse in oil: Why it’s a bad sign for all of us
The zombie apocalypse in oil: Why it’s a bad sign for all of us
The dramatic drop in oil prices has created what are called “zombie” companies, oil companies which can still afford to pay interest on huge debts, but little else. If oil prices stay low, the problem is likely to spread and become an economic zombie apocalypse for much of the industry and the communities and countries that depend on it.
Meanwhile, consumers have rejoiced as cheap oil prices have led to cheap gasoline, diesel, heating oil and jet fuel. Both households and businesses are finally getting their revenge on the oil companies after a decade of high and rising prices.
But should those consumers be so sanguine? Can the low prices we are experiencing today be extrapolated far into the future? The conventional wisdom says yes. It claims that the American fracking boom of recent years has unleashed a flood of oil that will keep prices down for many years to come. Combine that with an undisciplined OPEC that pumps flat out and you get not a temporary dip in prices, but a new era of low-cost oil and oil products.
But the same facts can be interpreted as leading to serious future supply constraints and high prices, provided the world economy does not fall into a prolonged slump that would reduce oil demand.
Cheap financing fed the fracking boom. And, even though borrowed funds are still cheap, struggling oil companies are finding their bank lines of credit reduced and a bond market that is shunning their high-yield debt. With additional funds hard to raise, many independent companies are finding it difficult to drill new wells needed to make up for declining production from existing ones, around 40 per cent per year in the two largest tight oil formations–the Eagle-Ford in Texas and the Bakken in North Dakota–where fracking is the primary technology for extracting oil.
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