China should shatter the myth that listed companies will never go bankrupt. Such an abnormal economic phenomenon will not only waste social resources but is also likely to trigger a financial crisis.
China did not have a bankruptcy law until 1988.
At that time, some people quibbled over ideological issues, thinking the law was a product of capitalism.
But as bankruptcy cases increased dramatically in China, more and more people noticed that practising bankruptcy helped promote competition and deepen the reform of stated-owned enterprises.
On April 1999, the civil procedure law was promulgated, containing the procedure for corporate bodies to repay their debts by going into bankruptcy. This has led to an expansion in the range of bankruptcies from state-owned companies to enterprises of other kinds of ownership.
However, behind the fact that many enterprises are on the verge of collapse, there is a common social belief that once a company is listed, it is protected from insolvency.
Up to now, not a single Chinese listed company has declared bankruptcy in accordance with judicial procedure.
Bankruptcy was originally regarded as the best way of dealing with heavy loss-making state-owned enterprises.
But even these enterprises, which have little hope of recovery, are not willing to declare themselves bankrupt.
As bankruptcy costs are high, it is understandable that the government decided to control the number and size of insolvencies to minimize the loss.
But to beautify those deficit-ridden companies and make them appear profitable misleads shareholders, cheating them to throw money into the abyss.
Compared to a bankruptcy announcement, the sacrifice may be greater when such camouflage tricks trigger a restive crisis on the financial and creditor market.
According to the law on enterprises, China Securities Regulatory Commission has the right to forbid listed companies from issuing stocks if they cannot make up the deficit after three successive years of loss-making. But the law has not been properly enforced.
As a result, loss-making companies still linger on the stock market, wasting social resources.
Also, there is a misunderstanding that the interest of shareholders should be protected as if they were depositors, and listed companies should avoid declaring bankruptcy to defend the interest of the investors.
In fact, the risk is different for depositors, creditors, shareholders, and investors.
Globally, governments have the responsibility to minimize the loss of depositors when banks go bankrupt. But it is natural that the shareholders are exposed to the risk of the stock market.
Survival of the fittest is the golden rule under the law of macro-economics. Market economy is, in essence, competitive economy. Economic prosperity will never come about without the establishment of a competitive mechanism.
To improve the situation, listed companies must strictly follow the rule of publishing annual financial reports within four months after the end of their fiscal year.
The fact that companies listed on the Shanghai and Shenzhen stock exchanges have announced the possibility of losses prior to the publication of annual reports is seen as a positive step for reducing market risk.
Securities experts believe that the advance warning of possible losses will help alleviate pressure on the markets resulting from the mass publication of reports by money-losing companies, as well as reducing risk and promoting rational investments.
Warnings will provide investors with a clear understanding of the performance of listed companies and will in turn facilitate the healthy development of the market.
(China Daily 11/01/2000)
