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Miao Leijie loses money on each ton of cement his company produces. But stopping production is not an option. When the plant opened in 2011 to supply the real estate and infrastructure industries in the northern Chinese city of Changzhi, the company raised most of the initial money from banks. Now, Miao, the factory's general director, needs to keep churning out cement simply so the company can pay the interest on its loans.
It will be tough for the business, Lucheng Zhuoyue Cement Plant, to get out of the hole. Customers and investments are drying up, and the company is borrowing even more money to stay afloat.
"If we ceased production, the losses would be crushing," Miao said, as he chain-smoked in the company's quiet, spartan office. "We are working for the bank."
Changzhi and its environs are littered with half-dead cement factories and silent, mothballed plants, an eerie backdrop to the struggling Chinese economy.
Like many industrial cities across China, Changzhi, which expanded aggressively during the country's long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth. But rather than shut down, Lucheng Zhuoyue and other Changzhi companies are limping along in a kind of march of the undead.
To protect jobs and plants, the government and its state-owned banks sometimes keep money-losing businesses on life support by rolling over or restructuring loans, providing fresh credit or offering other aid. While this may seem like an odd business tactic, it is part of a broader strategy to help maintain social stability, a major goal of China's leadership. Authorities in China's provinces and cities also back struggling factories just because they are deemed important to the local economy.
Similar strategies have been tried before, with little success. In Japan, such businesses, known as "zombie companies," are blamed for contributing to that country's two decades of economic stagnation. As China allows its own "zombies" to stalk the economy, the situation is clouding the country's outlook, making it difficult to predict where growth is headed. If the leadership doesn't address the underlying problem, the economic weakness could be prolonged.
Concerns have already been rising that China's slowdown is worsening and its problems are becoming harder to overcome. Such fears helped ignite a dramatic sell-off on stock markets around the world. Shares on the Shanghai stock exchange have tumbled by more than third since the June high.
"Global investors have now come to realise that China's travails are beginning to affect everyone," said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong.
Far from the sparkle of Shanghai or the export zones of Shenzhen, Changzhi is a modest city of three million people who live in low-rise apartment complexes and work in boxy factory compounds. The local economy depends on steel manufacturing and other heavy industries that girded the country's decades-long era of high growth. As the property market grew and the government plowed money into roads and other infrastructure, cement factories sprouted on the city's outskirts to capitalise on the bonanza, creating hundreds of well-paying jobs. In recent years, the busy local shops and crammed fast-food restaurants along Changzhi's narrow downtown streets bustled with new prosperity.
But the country's economy is slowing down, threatening that wealth. Gross domestic product expanded 7 per cent in the second quarter of 2015. While that would be a stellar performance by the standards of most countries, it is the slowest pace for China in a quarter-century.
Some industries are plummeting, wreaking havoc in less economically diverse cities and towns. Empty apartments built during the boom are now weighing down the property sector. Businessmen in Changzhi complain that construction projects supported by the local government have also been scaled back.
As a result, Changzhi's cement plants are saddled by excess capacity. Companies in the province can produce three times as much cement as what was actually needed in 2014, according to the Shanxi Provincial Association of Building Material Industries. Two-thirds of them lost money in that year.
Such conditions have turned once promising companies into zombies. While trucks are still parked outside the sprawling industrial compound of Changzhi's Huatai Cement Clinker Company, there are far fewer than just a couple of years ago, and they have less to haul. The money-losing company has produced a mere 200,000 metric tons of cement this year, even though it is able to make one million. As a state-owned enterprise, Huatai has been kept running with the help of special assistance. Huatai gets coal on credit and access to cheap loans from its parent company, which is owned by the provincial government. That has allowed management to keep all its 300 workers on the payroll - the company's top priority. "Our employees need to eat, they need to live," said one manager, who declined to give his name.
Such measures may help sustain employment, but they also delay the much needed overhaul of Chinese industry. A study of China's labour market by the International Monetary Fund released in July noted that state-owned enterprises tended to keep workers that they did not need. From an economic perspective, it would be better for such businesses to downsize or even close, releasing their trained staff to work at companies or in sectors with stronger prospects. That would shift resources away from less productive parts of the economy, helping get growth back on track.
Without such a shift, the economy could suffer in the future. Raphael Lam, deputy resident representative at the IMF in Beijing, said Chinese policy makers should move more forcefully to enact pro-market reforms and allow state-owned enterprises to restructure. If not, he says, "Over the long term, there would be an increasing likelihood of a sharper slowdown."
©2015 The New York Times News Service
