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China to end bailout of bankrupt state firms
Updated: 2005-03-28 08:58

China will end the practice of bailing out bankrupt state-owned enterprises (SOEs) within four years, and force them to sink or swim according to market rules, state media quoted an official as saying.

"In four years, SOEs will follow market rules and apply for bankruptcy according to the same laws and regulations as foreign and private companies," the Xinhua news agency said in a report quoting Shao Ning, vice minister of the agency in charge of state assets.

Shao said the plan by the State-owned Assets Supervision and Administration Commission to force state companies to survive on their own merits had been approved by China's cabinet, the State Council in February.

State media had reported the plan to stop propping up SOEs earlier this year, but did not give a timeline.

The government had already been giving less money to poorly performing state-owned companies over the years, but continues to inject funds into other state firms it believes can restructure and become profitable.

To help badly-performing SOEs retreat from the market smoothly, the Chinese government has adopted a series of bankruptcy policies on employees' rights, asset management and bad loans.

In recent years, 3,377 SOEs have gone bankrupt under these policies, with 6.2 million employees resettled, Xinhua said.

The move cost 49.3 billion yuan (six billion dollars) in subsidies with 223.8 billion yuan written off by state banks, said Xinhua.

There are still more than 1,800 SOEs to be closed down, according to Xinhua.

So far, Beijing and Shanghai as well as Jiangsu, Zhejiang and Fujian provinces have halted government bailouts.

But analysts said the plan may be difficult to implement when it gets to the local government level, especially in remote regions, because few local companies are profitable.

"It's primarily local governments supporting these enterprises because they have no other economic activities in their area," said Andy Xie, chief Asia-Pacific economist for Morgan Stanley in Hong Kong.

"The problem is when you go to some place like Shanxi province, how many companies are doing well?"

Further complicating the plan is the fact that most of the subsidies are now loans from state-owned banks, which are run by local governments who have an interest in propping up local companies.

It is also common for banks to give loans based on bribes or personal connections, not ability to pay back.

"The local governments feel these deposits from 'my provinces' should stay in 'my provinces'," Xie said.

"Who's going to enforce this policy? ... China now is very decentralized."

Northeast China, considered the country's rustbelt, and economically backwards western provinces will have to undergo a major adjustment if this plan is to be fully implemented, Xie said.

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