Zombie firms and over-capacity in Chinese manufacturing

•We calculate capacity utilization rate at firm level to measure the problem of over-capacity.•We document the stylized fact of over-capacity problem across industry, province and ownership.•We identify zombie firms and describe their distribution across industry, province and ownership.•We find evidence that zombie firms cause the problem of over-capacity and worsen it through crowding out effect.

The problems of over-capacity and zombie firms in China's manufacturing attract all aspects of attention, but academic analysis is still absent. Using firm-level data of Chinese manufacturing, this study first documents the problems of over-capacity and zombie firms during 2011-2013. We find that the over-capacity problem is much more severe in the northeastern and western regions of China, in heavy chemical industries, and in state-owned sector. The distribution of zombie firms is in a similar manner across region, industry and ownership. We also empirically test the relationship between zombie firms and over-capacity, finding that zombie firms cause and worsen over-capacity by crowding out healthy firms.