- The Washington Times - Monday, March 28, 2005

BEIJING (Agence France-Presse) - China will stop bailing out bankrupt state-owned enterprises within four years and force them to sink or swim according to market rules, state press quoted an official as saying yesterday.

“In four years, [state-owned enterprises] 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.

Mr. Shao said China’s Cabinet approved the plan by the state-owned Assets Supervision and Administration Commission to force state companies to survive on their own merits.

He announced the plan at a forum held Saturday. State press had reported the plan to stop propping up the state-owned enterprises (SOEs) earlier this year, but did not give a timeline.

The government has been giving less money to poorly performing state-owned companies over the years, but it continues to inject funds into other state companies it thinks 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 that performed badly have gone bankrupt under the policies, with 6.2 million employees resettled, Xinhua said.

The move cost $6 billion in subsidies with $27.2 billion written off by state banks, the news agency said.

More than 1,800 SOEs still must be shuttered.

On Feb. 2, the State Council said it approved the bankruptcy plan, the news agency said.

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

But analysts said the plan may be difficult to implement when it reaches 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 that most of the subsidies are now loans from state-owned banks, which are run by local governments with an interest in propping up local companies.

It is 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,’” Mr. Xie said.

“Who’s going to enforce this policy? China now is very decentralized.”

Northeast China, considered the country’s Rust Belt, and economically backward western provinces will have to undergo a major adjustment if the plan is to be fully implemented, Mr. Xie said.

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