天美传媒

So-called 鈥渮ombie credits,鈥� subsidized loans or credits for companies that aren鈥檛 viable, are meant to stimulate economic growth. They may have the opposite effect.

By Christian Eufinger

Inflation is still high in much of the eurozone. Although it has decreased significantly from 10.6% in October 2022, inflation has been more or less stuck since October 2023, .

But that could soon change thanks to an influx of Chinese products coming into Europe 鈥� a spillover effect of the Chinese government subsidizing Chinese firms, which allows them to produce more. These subsidies are often referred to as 鈥渮ombie credit鈥� because they鈥檙e loans provided to companies that aren鈥檛 financially viable, bringing them 鈥渂ack to life.鈥�

In my recent research paper published in The Journal of Finance, my co-authors and I found that because it creates an oversupply of goods and services in the market, which in turn puts pressure on prices to go down because there鈥檚 more competition among firms. Our paper serves as a mechanism for understanding how this chain of events works 鈥� and why an oversupply of goods in China could lead to disinflationary effects all the way in Europe.

The rise of zombie firms

Our research focused on the phenomenon of zombie credit in Europe after the global financial crisis of 2008 and the resulting debt crisis 鈥� a period that was characterized by highly accommodative and lenient central bank policies. After looking at data from 12 European countries across 65 industries, we found that indeed the share of zombie firms increased from 4.5% in 2012 to 6.7% in 2016.

But why are companies kept afloat that are not economically viable in the long run? In part because banks were left weakly capitalized by the economic crisis, and they hoped to avoid regulatory penalties and 鈥済amble for resurrection鈥� by propping up these firms. So it鈥檚 actually more of an unintended consequence of central bank policies than anything else: their intention was to stimulate growth and increase inflation, but they got zombie lending as an inadvertent side effect. These tactics kept inflation down, resulting in a period of economic stagnation that perplexed economists and policymakers alike 鈥� known as the 鈥渕issing inflation puzzle.鈥�

Through our research, we found that providing credit to nonviable firms can distort economic activity, reduce productivity and limit growth potential. That鈥檚 because zombie credit artificially inflates the number of active firms in the market and leads to excess supply, which creates artificially low prices and contributes to low inflation. It also leads to negative consequences for healthy firms by reducing their profitability and sales growth. We refer to this mechanism as the 鈥渮ombie credit channel.鈥�

Our findings show that in markets with a high prevalence of zombie firms, there is a notable decline in Consumer Price Index (CPI) growth. We estimate, then, that if weakly capitalized banks had been decisively recapitalized in 2009 鈥� strengthening their capital base through a series of policy actions 鈥� it could have reduced their incentives to engage in zombie lending and the annual CPI growth in Europe could have been up to 0.21 percentage points higher post-2012. This underscores the significant role that zombie credit plays in dampening inflation, thereby partially explaining Europe鈥檚 missing inflation puzzle.

Surplus of Chinese goods

Our research is one of the first to show that supply-side factors matter for inflation. And although our data focused on Europe, our findings can also be applied to other parts of the world in order to better understand current global economic contexts.

Take China as an example. In recent years, the country鈥檚 GDP growth has slowed to 4.5% 鈥� half of what its average growth used to be. As a result, the Chinese government has shifted from a growing economy with heavy investments in real estate toward a strategy of generating economic growth by supporting corporations with cheap credit.

In other words, the Chinese government is supporting certain borrowers that are under distress 鈥� borrowers that would usually leave the market if it weren鈥檛 for zombie lending. This is similar to European central banks鈥� approach in the aftermath of the financial crisis. And much like in Europe, China is seeing an influx of firms in the market that鈥檚 leading to increased supply.

As a result, we鈥檙e seeing spillover effects in Europe, where the local market is currently flooded with goods produced by Chinese firms. since the COVID-19 pandemic 鈥� approaching $1 trillion 鈥� and its prices are at their lowest levels since 2009. These products include electric vehicles, solar panels and wind turbines.

If we apply our findings 鈥� that zombie credit can lead to excessive supply, which brings prices down 鈥� then we can conclude that the influx of Chinese products could lower inflation in the eurozone. This could have a crucial impact on European central bank policy: If they expect disinflationary effects, they can begin to plan for further rate cuts.

At the same time, China鈥檚 trade surplus could have negative consequences on European companies, putting them at risk of being priced out by the availability of cheaper goods. This, in turn, could , and keep alive the ever-present threat of tariffs.

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