Noah Smith
· Noahpinion
· June 15, 2026 at 09:17
· ⏱ 14 min read
| Read on Substack ↗
Summary
China's financial system is engaging in widespread 'evergreening' of loans to unprofitable companies, mirroring Japan's post-bubble zombie lending. This keeps failing firms alive but drains resources from healthier businesses, depresses productivity, and drives 'involution'—aggressive price-cutting in sectors like EVs and solar—benefitting exports but hurting long-run growth. The article argues that government control does not solve the zombie problem and may worsen it.
•Japan's zombie company Daiei was kept afloat by below-market bank loans after the 1990 bubble, a pattern documented by Caballero, Hoshi, and Kashyap (2008).
•China's reported non-performing loan ratio fell to 1.5% even as the share of loss-making enterprises rose, suggesting unrecognized bad debts via evergreening.
•The Rhodium Group notes that loan rollovers are pervasive and that the National Audit Office found 16 of 43 audited banks had NPL levels double the official figure.
•The Dallas Fed shows that many Chinese companies, especially in real estate, cannot cover interest expenses from earnings, a hallmark of zombie lending.
•Alicia Garcia-Herrero estimates that zombie companies now make up 30% of listed green tech (EV, solar, battery) firms, surviving only through bank rollovers and local subsidies.
•Zombies compete for labor, land, and raw materials, crowding out productive firms and contributing to productivity stagnation—similar to Japan's 'lost decade.'