By Kang Yi, Wang Biqiang
Published: 2008-06-13

From News, page 5 , issue no. 371 June 9, 2008
Translated by Ren Yujie
Original article:

Special treatment for beleagured Chinese state-owned enterprises (SOEs) declaring bankcruptcy will end after this year.

Li Wei, the vice director of State-owned Assets Supervision and Administration Commission of the State Council (SASAC), said last week that SASAC would make efforts to bring about a "satisfactory conclusion" to the system, which has lasted 15-years.

Policy-based bankruptcy is a special arrangement for poorly performing SOE's to declare bankcruptcy and clear debt. Under its wings, a total of 5,600 SOEs will have done so by the end of 2008.

The biggest difference between SOEs' policy bankruptcy and traditionaly bankruptcy is that when SOEs declared the former, after liquidation and appraisals, all assets must be used for settling back-pay with employees before paying off bank debt.

The policy provided compensation for 10.18 million employees, but has been controversial because it sets repaying bank credit at a lower priority than compensating employees for pay they never received.

Qiqihaer – A Case of China's Special Bankruptcy
Qiqihaer Machine Tool Plant was nicknamed the "three-paycheck business" by employees due to its reputation for paying only three months of salaries in any given year. Song Liucheng, the section chief of the plant's enterprise management department, recalled that the plant's assets liabilities ratio was up to 240 percent in 1999, at which point local government decided to close it.

The plant applied for policy-based bankruptcy in 2003. After approval, it held a large meeting with creditors, where it cancelled debts worth 12.5 billion yuan and settled compensation for 12 thousand employees who were allowed to actively participate in the restructuring of the company.

Three subsidiaries were formed, and as a result, the gross industrial production of Qiqihaer Machine Tool Plant in 2007 grew 45 percent and profit rose 46 percent. Employees' average annual income for the year was 38,000.

Qiqihaer Machine Tool Plant was just one example of an SOE finding a graceful way out through policy bankruptcy. By the end of 2008, official statistics showed that there would be 5.6 thousand SOEs to have used the bankruptcy and 10.18 million employees whose compensation were settled under the law.

Reviving Giants
Qiqihaer is one of many SOE's who've declared bankruptcy since the State Council kicked off the program in October 1994.
According to data released by the Ministry of Finance (MOF), 30 billion yuan was used for SOEs' policy bankruptcy and employees' salary settlements in 2007 alone.

But Li Shugang, a professor at the China University of Law and Politics, pointed out that the central bank, China Banking Regulatory Commission (CBC), State Asset Supervision and Administration Commission (SASAC) and MOF only gathered statistics on costs covered by the central government, but had no way of calculating how much of the bankruptcy costs had been absorbed by local governments. He estimated that the overall costs of policy bankruptcy in its 13 years ran into hundreds of billions or even trillions of yuan.

Where to find the funds to clear bankrupt SOE's debts, and what do with their employees afterward, remained the most difficult issues facing those seeking policy bankruptcy.

According to an official from SASAC's Heilongjiang provincial office, the major source of the money to settle debts to workers was earnings from the transfer of land-use rights and other un-mortgaged assets.

The balance would be made up by government at the level corresponding to the SOE. For instance, the central finance departments would cover what could not be repaid through land-use rights transfers etc. for central enterprises, and local finance departments would cover what was still unpaid by local enterprises.

Li said the assets for settlement usually belonged to secured creditor, oftentimes commercial Chinese banks. A secured creditor is guaranteed precedence in claiming against assets in the case of their debtor's bankruptcy and need not compete with other unsecured creditors.

Commercial banks themselves would be at risk of bankruptcy if they were unable to recover the loans. Therefore, the state has subsidized commercial banks through other means--this was the main reason why four large Chinese assets management companies were founded in 1999.

The year 2008 marks the closing of SOEs' policy bankruptcy according to a February 2006 announcement. Hong Shuikun, the president of China Chengtong Group, said the enterprise would make efforts to finish the bankruptcy work before the end of this year.

However, it is highly unlikely that all SOE policy bankruptcies get wrapped up so quickly.

According to the Heilongjiang SASAC official, there were 101 policy bankruptcy projects left to be finished in the province. He was unsure whether the work could be finished in 2008 or not because it was still difficult to find enough money to settle outstanding payrolls.

But the official from SASAC said that as long as the project entered the policy bankruptcy pipeline before the end of the year, it would run its course until closure, even if that meant beyond 2008.