Resolving the problem of "zombie" firms can generate significant GDP gains of 0.7 to 1.2 percentage points per year for China over the next 10 to 15 years, IMF research said.
Debts of the country's "zombie" companies accounted for 5 to 9 percent of its total corporate debt by 2016, according to a new International Monetary Fund working paper.
Debt of companies in overcapacity sectors, such as coal, steel, cement, plated glass, aluminum and solar power, represents a share of 16 percent, the paper reported.
The State Council, China's Cabinet, defines nonviable "zombies" as firms that incur three consecutive years of losses, cannot meet environmental and technological standards, do not align with national industrial policies, and rely heavily on government or bank support to survive.
Such firms with weak fundamentals have become a key concern in China as they contribute to debt vulnerability and low productivity, and this issue is seen as one of the main reasons for the rise in corporate debts.
The Chinese government has made continuous efforts to tackle this issue through restructuring options including mergers and consolidation, liquidation, debt-equity swaps and corporate asset sales.
"In particular, deleveraging, reducing government subsidies, as well as operational restructuring through divestment and reducing redundancy have significant benefits in restoring corporate performance for 'zombie' firms," said the paper.
China has taken "deleveraging" as one of the government's top priorities.
The deleveraging process is not only about dealing with existing debts through such methods as debt-to-equity swap and clean-up of "zombie" State-owned enterprises, but also slowing accumulation of incremental debt, said Song Yu, chief China economist and vice-president of Beijing Gao Hua Securities Co Ltd.