China is ready to allow its last group of 2,000 money-losing state-owned enterprises (SOE) to go bankrupt with government bail-out in the next three to five years, an official with the Commission for Supervision and Management of State-Owned Properties under the State Council said Monday.

The announcement came with the submission of a draft corporate bankruptcy law to China's top legislature for first hearing Monday, which aims to put businesses of various ownership, whether state-owned, private or foreign firms, on the same footing in terms of competition.

"The 2,000 SOEs will be the last exception in China's market economy, and afterwards, all the 8 million companies in China will follow a unified corporate bankruptcy law if they fail," said the commission official who declined to be named.

The Chinese way of going-bankrupt for SOEs for the past 10 years was referred to as "administrative closure." Unlike bankruptcy in other countries, money recovered from insolvent SOEs was not to pay creditors, but to settle the unemployed first and with the leftovers going to creditors, or state-owned banks.

However, as banks are also state-owned, the losses have to be covered by the government coffer in the end.

"The remaining 2,000 SOEs, to be closed in the next three to five years, are mainly military factories and mining factories in remote mountaineous regions who can barely afford to pay their employees," said the official.

An updated report from the Commission for Supervision and Management of State-owned Properties shows that by April 2004, China had closed 3,377 insolvent SOEs through administrative intervention and resettled 6.2 million employees.

The Chinese government had also accumulatively allocated 49.3 billion yuan as SOE bankruptcy subsidy and allowed state-owned banks to write off a total of 223.8 billion yuan of bad loans caused by SOEs bankruptcies.

The corporate bankruptcy law draft is fully adapted to the market economy, said Li Shuguang, a drafter of the bill and vice-president of the Postgraduate School of the China University of Politics and Law.

It stipulates two ways for enterprises to withdraw from the market: One is merging and another insolvency. The law draft requires insolvent enterprises to pay back creditors first and then settle with its employees, which is in line with codes of international practices.

The draft also said that except the 2,000 SOEs underlined by the State Council, which will be closed in line with the previous administrative closure measures within a limited time, other SOEs must follow the law when promulgated.

Li Shuguang said after the 2,000 SOEs complete administrative closure, China's nearly 8 million enterprises will adopt the same bankruptcy law. It means that China's more than 100,000 SOEs will become "equal competitors" in the market economy.

He said the fact that the bankruptcy law draft could be submitted to the 10th NPC Standing Committee for the first deliberation this time after 10-year-long drafting work should be attributed to the deepened SOE reform and maturing social security system already in place.

"From administrative closure to law-based bankruptcy, the landscape of a market economy is more clear in China," Li said.

Source: Xinhua