Going bankrupt is a solution for an enterprise that has fallen into deep trouble. In legislation, the law on bankruptcy aims to offer debtors a road to get relief and clear up debts as well as to protect the legal interests of all stakeholders. But in reality, many Chinese enterprises find it very hard to go bankrupt until their debt issues become incurable and have a big impact.
The history of law and regulations on bankruptcy is not long in China. China's top legislature issued the country's first Law on Bankruptcy for Enterprises in 1986, providing a legal framework and procedures for enterprises to go bankrupt. In the late 1990s, many state-owned enterprises across the country went bankrupt as part of the implementation of economic reform. At that time, liquidation was the major approach of bankruptcy, by which an enterprise shut down and sold assets to repay debts. In 2006, the Standing Committee of the National People's Congress amended the bankruptcy law. So far, the law regulates three solutions after an enterprise goes bankrupt: reaching compromise with creditors, reshuffle and liquidation.
In recent years, many enterprises met difficulties and fell into debt as economic growth took a downturn. However, the number of bankruptcy cases did not increase correspondingly. The reasons differ. Some enterprise owners were not willing to let their enterprises die. Some local governments set barriers for enterprises to go bankrupt in order to maintain the GDP and employment rates. Some courts were too prudent in dealing with bankruptcy cases, which slowed down the process.
During the Central Economic Work Conference in December 2017, policymakers stressed solving the issue of "zombie enterprises" through approaches like bankruptcy and asset restructuring in a bid to further supply-side structural reform and shift toward high-quality development.
(This is an edited excerpt of an article published in Caixin Weekly on December 25, 2017)