China Wants More Mergers Of Ailing State Firms

China wants fewer bankruptcies and more mergers as a result of new rules to eliminate thousands of loss-making state firms unable to cope with competition and draining state coffers, economists said on Monday.

Chinas state media hailed Beijings announcement on Sunday that it had set up a team under the State Council, or cabinet, responsible for bankruptcies, mergers and helping the jobless in a step towards tackling a communist taboo that has hampered reform of the state sector.

Bankruptcy experts welcomed the new regulations, the most detailed China has issued as it has tiptoed warily down the path of allowing state firms long regarded as the backbone of a socialist economy to go under.

 

These additional rules regulate bankruptcy and specify the circumstances for bankruptcy to prevent evasion of payment of debt through false declarations of debt, and also to reduce the scope of bankruptcy, said one official of the State Economic and Trade Commission. The rules encourage mergers, he said.

China has stressed that it wants insolvent state firms to merge with their more successful cousins rather than go bankrupt thus protecting state-owned assets while preventing a surge in unemployment and possible social unrest.

This is a good year to carry out mergers because of a combination of the governments support and market demand, said Shanghai bankruptcy expert Li Junjie.

More Chinese enterprises understand that they can expand their market position by reorganising through mergers, he said.

The new rules, the first since China passed its bankruptcy law in 1988, set down detailed methods for mergers and bankruptcies. The rules encourge mergers through preferential policies such as scrapping interest on bank loans, the commission official said, referring to a five- to seven-year grace period on loan repayment for the company that takes over in a merger. The company is also exempted from interest payments.

The scope of mergers is expanded in pilot cities to companies engaged in internal trade, foreign trade, construction and commercial enterprises, when before it was just industrial enterprises, the commission official said. China has designated 110 pilot cities in which bankruptcies and mergers of state firms can be implemented.

China has said that reform of the lumbering state sector, with about 70 percent of enterprises making losses or hopelessly in the red, is a priority in 1997 and the bankruptcy rules were its first specific policies this year.

The difficulties currently confronting state-owned companies are inevitable in the process of economic reform and the upgrading of the industrial structure, the Peoples daily said in a front-page editorial on the new rules.

State-owned enterprises must gear themselves to the market, reorganise their existing assets and labour force and speed up structural readjustment if they want to extricate themselves from their tough situation, it said.

Bankruptcy experts say China must rapidly accelerate the pace of closing insolvent firms, with the current rate of bankruptices at about 0.06 percent of itss estimated 10 million companies, including private and semi-state collective firms and the 100,000-strong state sector.

Bankruptcies soared more than 160 percent in China last year to exceed the total for the previous seven years. As many as 10,000 firms could declare bankruptcy this year, although many would be private, said Li Junjie.

Another new part of the rules was the exclusion of non-state firms from the benefits of bankruptcy granted to state firms, closing a loophole that private firms had used to escape debt, Li said.

The State Council has always stressed the importance of introducing more mergers and letting fewer firms go bankrupt, the Peoples Daily said.