Beijing Tries to Limit Slew of Bankruptcies

In the red, state firms seek foreign investors or takeovers

By , Staff writer of The Christian Science Monitor

THE 360 workers at the Xinle beverage factory had no work, pay, or hope until officials lured a white knight to bail out the ailing company.

With the plant near bankruptcy last year and shut off from new bank loans, a city contingent desperately combed northern China for a healthy company to absorb the factory and save jobs. Four times, Xinle officials approached and begged Haomen Group, a conglomerate with a growing beverage business, but were rejected.

Then, Haomen got wind that a major new airport was in the works for a site three miles from Xinle, located south of Beijing in Hebei Province. Suddenly, Xinle, with $4 million in debt, $5 million in antiquated plant equipment, but almost 30 acres of prime real estate for commercial development, didn't look so bad. They struck a deal, the factory is producing and expanding, and workers earnings have doubled. ``We have several real estate projects in the works that will assure we can assume any loss,'' says Xia Guangxing, an executive at Haomen headquarters in Yutian, about 150 miles east of Beijing.

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Public companies sinking

Across the bleak, cash-strapped landscape of Chinese public-sector industry, there are few such happy endings to the desperate scramble to keep troubled state-run enterprises afloat.

Fearing that mass bankruptcies will trigger a wave of worker unrest, China's ruling Communists are determined to preserve a core public sector that is rapidly being overtaken by more vital private and joint-venture sectors. Barred from declaring their companies insolvent, a growing corps of factory managers are limping along in hopes that foreign investment can be found or takeovers can be engineered.

With almost one-half of China's 14,000 large and medium-sized enterprises running in the red, according to official figures, and with workers becoming more uneasy, Beijing has been forced into massive bailouts over the last two years to help state-run companies pay wages.

Chinese economists say more than 10 percent of state-run companies have stopped production, mainly in coal, textiles, and military-related industries, and estimate that only one-third of all state enterprises could survive on their own if subsidies stopped.

Western and Chinese analysts charge that the momentum of market reforms is stalling under the staggering burden of state companies. Officials agree that bankruptcy must be the answer but insist that the country is not yet ready to deal with the consequences of economic restructuring and an increasingly militant labor force.

``In the future, there will be bankruptcies. But first, there must be development of a social enterprise system,'' says Li Pan, a city development official in Wuhan, one of China's most dire industrial graveyards. ``Now we are designing a system to take care of people who have lost their jobs. We are going to set up an insurance system in the whole society.''

Beijing says it is grappling with the mounting problems of state-run companies by providing unemployment insurance, selling companies to overseas bidders, and speeding up bankruptcy reforms.

Major cities such as Beijing, Tianjin, and Shanghai have set up unemployment insurance funds, although workers can receive $20 a month at most.

After two unsuccessful attempts to peddle deficit-ridden enterprises to Hong Kong and other overseas investors, Sichuan Province announced in April that it would sell 33 machinery, electronics, metallurgical, and pharmaceutical firms with more than $400 million in assets and 77,000 workers to foreign investors.

``Regarding the enterprises to be sold, foreign investors can purchase any of the enterprises in their entirety or in part, or they can invest directly as shareholders,'' says Diao Jinxiang, vice-governor of Sichuan, the first province to allow a state-sector bankruptcy two years ago.

The government plans to speed up enforcement of the bankruptcy law in 16 industrial centers with almost 25 percent of state enterprises, according to reports in the Hong Kong press. Beijing took a step toward writing off bad debts by setting aside almost $1 billion, analysts say.

Few bankruptcies allowed

But analysts still question government resolve. Since China's bankruptcy law went into effect in 1988, courts nationwide have handled fewer than 1,000 cases, Chinese newspapers report. Bankruptcies, limited to small companies, are often shrouded in secrecy and get little coverage in the Chinese press.

``Because of the high deficits and large number of workers that would be affected, local governments are hesitant to enforce the bankruptcy law,'' a Chinese analyst says. ``Local specialized banks, which are the chief creditors, also take a negative approach toward enforcing the law. Bank officials are afraid that their mistakes and malfeasance in handling credit will be exposed in bankruptcy cases.''

Unlike many state firms, the Xinle plant had a future because of its land assets, the main reason for company mergers in China, analysts say. ``Many small companies are in trouble and facing bankruptcy because they aren't efficient and can't produce for the national market,'' says Mr. Xia, the Haoman official. ``Scores of small companies have approached us and begged us to take them over.''

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