Policy-arranged bankruptcy has been the last shelter for China's State-owned enterprises (SOEs).

However, when the Standing Committee of the National People's Congress, China's top legislature, approved new bankruptcy laws, 100 thousand SOEs lost the privilege of government protection and rescue and must now independently settle debts according to market rules.

Policy-arranged bankruptcy for China's SOEs dates back to 1994. The government offered special protection to bankrupt enterprises, including special rules for property and paying back orders, as well as providing financial support. In the central government's 2006 budget, 33.8 billion yuan has been allocated to the bankruptcy of SOEs.

Once the law comes into affect, bankrupt companies should first pay for claims with secured property, and then pay wages, medical bills, insurance and other compensation due to employees.

In the past, compensation and insurance for employees was paid first and sometimes secured property including bank collateral was used to do this.

As of the end of last year, there were 3658 SOEs bankruptcies. Two-thirds of existing SOEs and a number of energy-exhausted mines had also begun bankruptcy proceedings, and needed to be withdrawn from the market, according to an investigation by the State Council.

The Chinese Government had previously planned to close another 2,000 SOEs by 2008. As this plan was drawn-up before the new law came into effect, these enterprises will be liquidated under the old system. However, the remainder of SOEs will have to settle their debts by themselves.

The new bankruptcy law will end government rescue of enterprises that get into financial trouble as a result of poor management or negligence.

By People's Daily Online