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China drafts new bankruptcy law
2002-04-30
Business Weekly
China's long-awaited new bankruptcy law, which is likely to determine the fate of many State-owned enterprises (SOEs) and their employees, has been drafted, but the National People's Congress (NPC) has not given word as to when the draft will be reviewed or approved.
Last week in Beijing, at a forum held by the Financial and Economic Committee of China's top legislature, which is also the drafting committee of the new bankruptcy law, experts and officials from both home and abroad shared their views about the draft of the new bankruptcy law.
The new legislation is seen as a key move to further bring China's legal system in line with international practices - an important and urgent task now that the nation has joined the World Trade Organization (WTO).
China is anticipating a mergers and acquisitions (M&As) boom as overseas companies are keen to rapidly enhance their presence in the country following its accession to the global trade body.
However, the existing legal framework does not make provisions to adequately accommodate M&As and related corporate activities.
The new bankruptcy law, which includes guidelines for bankruptcies, is expected to help clarify and streamline bankruptcy procedures and pave the way for M&As.
Consensus is building among experts and officials that the latest draft, if approved, will help Chinese enterprises reorganize their capital structure and facilitate debt restructuring.
They said the planned new law will help creditors and debtors resolve conflicts when companies are on the verge of bankruptcy.
However, officials sealed their lips when asked when the draft would be submitted to the NPC for first review.
A source with the NPC's Financial and Economic Committee revealed to Business Weekly that the draft committee originally planned to submit the draft this April, but it had to postpone the plan and wait for "good timing" since the new legislation will probably determine the future of many troubled SOEs and their employees.
Over the past few years, the resettlement of laid-off workers has become a strenuous task for governments at all levels.
Li Shuguang, vice-dean of the graduate school of China University of Politics and Law, said: "Two main obstacles have prevented further increase of the bankruptcy rate: China's already substantial unemployment problem and the fragility of the financial system.
"A steep rise in the number of bankruptcies would exacerbate the unemployment problem, threatening widespread social unrest," he added.
According to the National Bureau of Statistics, Chinese SOEs had laid off 5.15 million workers by the end of last year, and the registered unemployment rate in urban areas hit 3.6 per cent last year.
Li, who is also director of the Bankruptcy Law and Reorganization Research Centre of the university, further explained: "A multiplication of the loss of debt rights on the part of the State banks could make financial institutions, the largest creditors of SOEs, technically bankrupt, and thus trigger a financial crisis."
Charles Booth, a law professor at Hong Kong University and a specialist in bankruptcy law, said: "Do not expect a dramatic increase of bankruptcy cases triggered by the new legislation, but the promulgation of the law could bring some immediate benefits.
"It could demonstrate the government's new stance to address the financial problems in the nation," Booth elaborated.
The existing Bankruptcy Law does not adequately address a wide array of problems which occur during the bankruptcy process, said experts from asset management companies.
Asset management companies, which deal with the non-performing assets of State banks, are the main creditors of SOEs.
Besides a narrow application scope and lack of reorganization procedures, there are also conflicts and inconsistencies between the Bankruptcy Law and existing government policies, said Li.
Though no timetable has been revealed for the passage of the new legislation, the draft has seen a strong reaction from China's securities markets.
Last Thursday, listed ST (special treatment) companies, which have seen losses for at least one year but less than three years, experienced heavy trading shortly after the draft was revealed to the public.
Insiders say ST companies would probably work against time to speed up their restructuring before the new legislation comes into effect.
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