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The corporate bankruptcy law that came into effect on June 1 ushers in a new phase in the development of China's market economy.

 

From now on, all corporations in China, State-owned or private, will follow a unified bankruptcy law. They will have a level field should they declare bankruptcy.

 

As one of the basic laws underpinning the country's market economy, the bankruptcy law will standardize an orderly exit for failed businesses. This will enable the market to assume an even bigger role in raising the overall efficiency of the national economy.

 

Today, as the Chinese economy continues to grow at a double-digit rate and corporate profits soar ever faster, implementation of the bankruptcy law might look irrelevant.

 

But the law has far-reaching significance for the long-term, sustainable growth of China's market economy.

 

The precursor of this law was promulgated in 1986 on a test basis that only covered the liquidation of State-owned enterprises (SOEs). During most of the 12 years of preparing for the new law, which was finally passed last August, the country has been dealing with the insolvent State firms.

 

Most of them cannot withstand the increasingly fierce market competition as the country shifts steadily away from central planning.

 

From 1994 to 2005, a total of 3,658 moribund State enterprises closed with the assistance of government subsidies. Another 2,000 SOEs named by the State Council will be closed with the aid of government bailouts, paying laid-off workers first.

 

After years of painful reorganization, key State-owned companies have raised their profitability in recent years to ride China's ongoing economic boom.

 

However, the viability of a number of State firms as well as many private companies remains untested by an economic slowdown. With the new bankruptcy law in place, failed enterprises will liquidate in a standardized, faster manner to facilitate reallocation of capital. Banks will also be in a more advantageous position to limit risk and loss of loans.

 

By stressing creditors' rights, the new law has improved China's legal environment for the market economy and reassures investors at home and abroad.

 

(China Daily June 4, 2007)