Coal miners in Huaibei in East China's Anhui Province Photo: CFP

The central government will set up a special 100 billion yuan ($15.31 billion) fund to deal with the problem of "zombie companies" and help domestic industrial enterprises adjust their structures accordingly, officials from the Ministry of Industry and Information Technology (MIIT) said at a press conference on Thursday.

Allocated over a period of two years, the fund will mostly be used to tackle the problem of staff relocation during the structural adjustment, Feng Fei, vice minister of the MIIT, said at the press conference.

Staff relocation is a particular problem for zombie companies, or firms that have made losses for years and survive mostly on government subsidies or bank loans, Feng noted.

Zombie solution

The number of zombie companies has increased in China in recent years, with various industries declining amid weak domestic demand. According to statistics released by the National Bureau of Statistics on January 27, profits at China's large industrial enterprises fell 2.3 percent year-on-year in 2015.

"It's hard to estimate the scale of zombie companies in China. I would say that in most areas, zombie companies are random cases and wouldn't affect the overall economic situation in those places," Zhong Dajun, director of the Beijing Dajun Institute for Economic Observation, told the Global Times on Thursday.

"But in some areas like North China's Shanxi Province, where the pillar industry is mired in depression, the issue is more serious and harder to solve," Zhong said.

The State Council has decided that phasing out zombie companies will mostly be carried out in the coal and steel industries, Feng said.

Mergers better than bankruptcy

According to Feng, merging and restructuring should be the main ways to deal with zombie companies, while bankruptcy and liquidation should be resorted to less often.

"This is a very logical approach," Zhong noted. "The costs of merging and restructuring are much lower than with liquidation. Besides, the companies in trouble might have a chance of resurgence if they merge with a more powerful company."

Feng noted that the government can help improve the market environment for mergers and acquisitions, such as by encouraging bank loans for such activities. At the same time, tax policies could be developed to ease problems during the process.

But Feng stressed that the market should play the main role in zombie companies' restructuring, and the government should only take a supportive role.

Staff relocation 

"The government could also ease the process by helping with the problem of redundancies," Zhong said.

Staff relocation is a thorny issue, which can be tackled only with a "powerful underpinning policy," such as establishing the special fund, Feng noted.

"Many companies should be able to solve the problem of staff relocation with their own assets. The fund is for companies that are completely broke, or companies whose leaders are entirely irresponsible," Zhong said.

Xu Hongcai, director of the Department of Information under the China Center for International Economic Exchanges (CCIEE), told the Global Times on Thursday that details of how the fund operates should be revealed to the public.

The government should also help carry out job training and create new job opportunities for the zombie companies' staff, Xu noted.

Apart from clearing up zombie companies, the government should also push for the phasing out of inefficient capacity, Miao Wei, head of the MIIT, said at the same press conference. Cutting overcapacity was listed at the Central Economic Work Conference held in December 2015 as one of the major economic tasks for 2016.

China eliminated 91 million tons of inefficient capacity in the iron industry and 94.8 million tons in the steel industry from 2011 to 2015, Miao said.