On August 27, the National People's Congress (NPC), China's top legislature, adopted a
long-awaited, revised Corporate Bankruptcy Law, which will come
into force on June 1, 2007.
As far as the market economy is concerned, bankruptcy
legislation, regarded as an "economic constitution" in foreign
countries, deals with issues relating to market exit. In other
words, "it's a law about 'death'," Li Shuguang, a professor from
China University of Political Science and Law, said in an interview
with Guangzhou-based Southern Weekend on August 31. "Without
this 'death' deterrent effect, where comes the respect for 'life'?
And would order in a market economy be established?"
Li Shuguang
When China drew up its first bankruptcy law on a trial basis in
1986, which applied to public enterprises only, bankruptcy was
still a much-feared subject. Although the public has gradually come
to accept the concept of bankruptcy, the number of private
enterprises entering the market mushroomed but there were no real
legal restraints on them. A direct consequence of this was that
creditors had no legal recourse to their claims.
In 1993, the government set about amending the law. Li was
commissioned to participate in the revision work.
The key change was to subject all corporations to bankruptcy
rules and regulations. More important, the government, which used
to play a leading role in handling bankruptcy affairs, now takes a
back seat.
"Whatever goes wrong, the market is responsible for settling its
own affairs, while the government will stay in the background," Li
said. "State-owned enterprises (SOEs) are no more in a privileged
position, and all corporations play by the same rules of 'survival
of the fittest'. The aim is to create a fair and open environment
for investment and trading."
Another significant amendment is the inclusion of financial
institutions under the purview of the bankruptcy law. However,
owing to the complex nature of the financial services sector,
regulatory and supervisory authorities are allowed to intervene in
the closing down or restructuring of banks, and securities and
insurance companies. "This is almost the only case where government
departments can have a hand in bankruptcy matters," Li said.
When an SOE declares bankruptcy, the revised law will give
priority to creditors' claims. "Actually, before this consensus was
reached, there was a deep chasm in opinion, and this provision was
the most controversial," Li noted.
"Some lawmakers insisted on first protecting the interests of
laid-off workers," he continued. "Nevertheless, how to re-employ
retrenched workers is a by-product of an economy in transition
(moving from a planned to market economy) that demands the
attention of society as a whole. However, ensuring the rights of
creditors doesn't mean that those of laid-off workers would be
ignored. In my view, what is more pressing is to establish a
bankruptcy protection fund and perfect the social security system,
so that impoverished workers can get timely help."
The US and the EU are paying close attention to China's
bankruptcy revisions. From the time that the first foreign
investors were allowed into China, innumerable debt/credit
relations have been established. Without legal protection,
investors in many cases can only seek redress directly from
influential government officials.
In addition, China, an increasingly important international
trading partner, has been involved in trade disputes in recent
years with many countries. The usual complaint is that the low
prices of Chinese products give it an unfair competitive edge over
others. Chinese companies have also been criticized for paying
unreasonably low salaries to employees, one of the methods business
owners use to cut production costs. Further, several loss-making
SOEs, buoyed by government subsidies, choose to continue to drag
out a feeble existence rather than file for bankruptcy.
"The approval of the revised bankruptcy law will help to improve
the domestic investment environment, and to a great extent, free
our trading partners from doubts and misgivings about China's
market," Li said.
He also proposed the establishment of a state bankruptcy
administration to ensure that the law is properly implemented. "To
avoid buck-passing, it's necessary to establish a special organ
that will be in charge of bankruptcy management, data collection
and publication, transnational bankruptcy cases, and follow-up
legislation," he said.
What concerns Li is that the current law does not cover
individual bankruptcy. "I hope an 'individual' bankruptcy law will
be enacted within the next decade," he said.
What remains to be answered is whether the Corporate Bankruptcy
Law would encourage more companies to declare bankruptcy as a way
of avoiding debt settlement? And will this lead to a credit
crisis?
(Southern Weekend, translated by Shao Da for
china.org.cn, September 11, 2006)
