Feature: China's war on zombie companies

BEIJING, March 6 (Xinhua) - After a career building and repairing ships, Bao Hongyi (a pseudonym), 48, never expected the shipping industry to sink so quickly.

A month ago, the state-owned Wuzhou Shipyard, where Bao began working as a technician in 2001, filed for bankruptcy.

"I used to think that day would never come to a state-owned company," says Bao, looking sadly at the shipyard on Wukuishan Island, in Zhoushan city of east China's Zhejiang Province.

Wuzhou Shipyard is involved in China's campaign to phase out poor-performing "zombie companies".

A government work report, delivered on Saturday by Premier Li Keqiang, listed closing such companies a priority.

"Zombie companies" are economically unviable businesses, usually in industries with severe overcapacity, kept alive only with aid from the government and banks.

Local governments and sometimes closely connected banks often extend liquidity to companies to protect local economies and employment.

Steel, coal and cement are other industries that have incurred big losses in recent years because of huge overcapacity. China's producer price index, a weighted index of prices measured at the wholesale or producer level, fell for 47 months.

Things at Wuzhou Shipyard began souring during the global financial crisis of 2008. "At its peak around 2007, so many - over 3,000 - employees were working here that there were not enough dormitories to house them all," recalls Bao.

Shipbuilding began a downward spiral as shipping rates fell during the global recession. A 64,000-tonne bulk carrier that once sold for 320 million yuan (48 million U.S. dollars) now has a price tag of just 120 million yuan.

By the end of September 2015, Wuzhou Shipyard had amassed debts of 911 million yuan against total assets of 534 million yuan.

Jobs were cut, but orders and money from its parent company, the state-downed Zhejiang Shipping, kept it going.

In the end, it was unsustainable.

"The original plan was to shut down after completing unfinished ships, which would help pay off some debts," says Han Jun, a lawyer and trustee in the bankruptcy of Wuzhou Shipyard. "But the shipping industry just didn't recover, and we were worried the ships could not be sold."

Zhejiang Shipping eventually cut Wuzhou Shipyard loose - partly because of the drain on finances, but also because central authorities in Beijing decided to be tough on zombie companies.

These companies exhausted financial resources that could otherwise fund innovators, and dragged down workers with them, government officials repeatedly argued.

The government will establish a fund of 100 billion yuan to assist those made redundant as a result of industrial restructuring, according the Ministry of Industry and Information Technology.

The key in bankruptcy is to subsidize and help affected employees, said Chen Naike, a deputy to the National People's Congress, the national legislature.

In the bankruptcy of Wuzhou Shipyard, the parent company first paid out in full its obligations to employees. Regional governments are preparing for similar contingencies.

In south China's Guangdong Province, the country's manufacturing powerhouse, authorities announced they would close all zombie companies in three years, and they are readying to help the new jobless.

The government's commitment to addressing overcapacity chimes with its economic reform agenda, notably the shift to supply-side structural reform, which Beijing has put high on its agenda.

As the zombie companies close, the government wants to see financial, land and human resources unleashed from these enterprises flow to other promising industries.

Bao's former colleagues are already finding other jobs.

"A young technician I worked with found a job in a cruise company," Bao says. "Opportunities are emerging in new industries like this." Endi