Shut down zombie firms, compensate staff

Zombie companies, referring to those that need constant bailouts in order to operate or indebted ones, owe their existence for a variety of reasons. Some met their sorry fate after being stripped of their performing assets, while others did so because the central and provincial governments left them to rot after they fulfilled the temporary purposes for which they were established. Still others are paying the price for not fully implementing reform and meeting market demands.

Although zombie companies can temporarily reduce unemployment pressure, market rules demand them be given a decent burial because they are not only inefficient but also consume huge amounts of resources. Besides, the eradication of zombie companies will help the transformation and upgrading of the economic structure, which, in turn, will facilitate high-quality employment growth and social stability in the long run.

Phasing out zombie companies is mandatory in the process of reform; it will also prudently solve the problem of overcapacity and promote supply-side reform. The recent executive meeting of the State Council, China’s Cabinet, advocated eradicating zombie companies to help Stateowned enterprises perform more efficiently. But in the process of eradicating the zombie companies, the most important task is to properly deal with their employees.

First, before shutting down a zombie company — or merging it with a healthy enterprise or reorganizing it — the authorities should start job-transfer training programs for its employees so that they can get jobs in other companies. For those who are not suitable to seek re-employment, the company should terminate their labor contracts and pay them compensation according to the Labor Contract Law. Also, employees close to the retirement age should be encouraged to retire early, and the company should reserve funds to pay employees’ basic subsistence allowance and social security fee.

Second, before a zombie company enters bankruptcy liquidation, it should pay its employees compensation according to the Labor Contract Law, and its assets should be used to pay their unpaid salaries and social security fee to safeguard their rights and interests.

Third, the company should complete the unemployment registration work for its laid-off workers, who should receive the unemployment benefits guaranteed by the law. For the period the laid-off workers get the unemployed benefits, their medical insurance premiums should be paid from the unemployment insurance fund. And the unemployment insurance authorities should take steps to keep the number of unemployed to the minimum by providing subsidies for enterprises that hire laid-off employees.

Fourth, employment services and training should be strengthened to promote re-employment. The authorities should encourage laid-off workers to find jobs on their own or start their own businesses by offering them tax benefits and microcredit loans, as well as strengthening public welfare programs for them. And the government should inject more funds in re-employment training programs to help laid-off workers seek re-employment.

Fifth, employees’ social insurance needs to be strengthened, for which they should join the urban employees’ social insurance project, with self-employed people joining the basic pension and medical insurance schemes. The authorities should also provide urban resident subsistence allowance for the impoverished families.

Moreover, although the market should be allowed to play the deciding role in the eradication of zombie companies, the government should also play a key role in the process.

The government should promote mergers and reorganization rather than bankruptcy liquidation when it comes to the eradication of zombie companies, in order to reduce the number of laid-off workers, and control the pace of the eradication process, depending on the regional economic development level and social tolerance capacity to avoid massive numbers of lay offs in a short period. The government should also supervise the process, especially the disputes related to employees’ interests. The author is deputy director of Social Security Research Institute, Ministry of Human Resources and Social Security.