Foreign Policy Digital

China’s Zombie Firms Can’t Lurch Forever

As state-backed companies' debts mount, China faces an inevitable slowdown.

China National Erzhong Group’s factory campus is not what you’d expect of China’s highly touted military-industrial complex. Old men in faded blue overalls squat while weeding the pavement in the steamy Sichuan heat, fighting a losing battle against the vines and creepers that have already taken over the older factory buildings. Around midday, the place empties out as workers go home for their 2½-hour lunch break. Bicycles leave first; cars are allowed to follow 15 minutes later.

Retirees living in old company-allocated apartment buildings that skirt the campus grow vegetables on unused land at the base of the factory walls. And the factory’s first generation of managers, now in their 90s, live with their children and grandchildren in a handful of villas shaded by trees growing kumquats and ball-bearing-sized huajiao, the mouth-numbing spice used in Sichuan cooking.

Erzhong — literally “second heavy,” as in China Second Heavy Machinery Group — started life as an offshoot of the Chinese Red Army. In 1958, workers from China’s northeast, the country’s industrial heartland and the home of First Heavy, were relocated to Deyang in western Sichuan province to make large-caliber artillery at what was deemed a safe distance from the Soviet Union in case China’s onetime ally decided to invade. Even today, the thick, guttural drawl of the northern transplants and their children sticks out among the lispy pronunciation of the native Sichuanese.

But, for all its backwater charm, Erzhong is part of the backbone of China’s industrial infrastructure. No longer just a defense contractor, it makes entire steel mills and most of the parts needed to build a nuclear power plant. It makes crankshafts for cargo ships and

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