In China It's Politically Correct to Go Broke

Communist Party plans to let ailing state firms go bankrupt and to help idled workers

FOR years, activist Cao Siyuan has been on the wrong side of the Chinese government. During the 1980s, Mr. Cao's advocacy of political reform cost him his government job and even landed him in jail.

Now free, Cao thinks he and the government are starting to think alike.

After years of subsidizing rather than closing decrepit state enterprises created under Mao-era communist economics, Chinese authorities are buckling under a mounting financial strain and starting to see bankruptcy as a politically correct solution.

Cao, who is director of Siyuan Merger and Bankruptcy Consultancy in Beijing, says the government's moves have created ``a rousing business,'' although Cao seems to have more enthusiasm and ambition than clientele. ``The authorities can no longer hide the fact that many state enterprises should go bankrupt,'' he says.

A quickened pace to let state enterprises go bankrupt, close, or merge now appears possible, Chinese and Western observers say. Thousands of failing state industries will be targeted in 1995, the government announced in October, while also admitting that almost 50 percent of state firms are running in the red and that such enterprises pose the biggest obstacle to the creation of a capitalist-style economy.

Beijing's pledge came just weeks after an experiment was launched in Shanghai, Tianjin, Chongqing, and 15 other industrial cities to test the effects of bankruptcy. The test was backed by an $800 million fund to cover losses of central and local banks.

Next year, Beijing will beef up a newly implemented social security system, and it plans to establish special companies to assume debts of ailing state firms in exchange for assets, officials have said. Since the experiment was unveiled in August, two major bankruptcies were announced in Wuhan, and Shanghai has more than 10 large enterprises targeted for liquidation, according to a report in the official Wenhui Daily.

Conservative Prime Minister Li Peng admitted recently that the pace of default among state firms would have to pick up in coming years to make the economy more competitive internationally.

Although he cautioned a state welfare system would have to be created to deal with worker displacement, he predicted that one-third of state-run companies would be privatized or forced into bankruptcy soon.

``The most important problem with bankruptcy is to reaccommodate the employees...'' Economic and Trade Commission Minister Wang Zhongyu was quoted as saying by the official China Daily. ``It is a problem of vital importance to social stability.''

But, given the magnitude of the problem, Western diplomats and analysts predict central authorities will continue to move cautiously due to fears that mass unemployment could trigger urban social unrest.

Enforcement of China's bankruptcy law has been largely ad hoc since it was enacted eight years ago. Since then, less than 1,000 insolvency cases have been handled in Chinese courts.

While private companies and entrepreneurs, collectives and publicly listed firms, and foreign joint ventures propel the Chinese economy's rapid growth, the more than 100,000 state enterprises are wallowing in losses, and 10 percent have stopped producing completely, Chinese economists claim. State enterprises, which in the past funded up to 90 percent of the operations with bank loans and are now being squeezed by tight credit, account for less than half of China's total industrial output, down from two-thirds just five years ago.

State firms are notoriously inefficient, outdated, short of capital, and over-staffed. Government figures show that two-thirds of China's 17 million ``excess'' industrial workers are employed by state firms which provide housing, food, education, and other employee needs under the ``iron rice bowl'' welfare system. Management consultant McKinsey & Co. estimates these firms spend on an average 6 percent of their total costs in providing such services.

But time is slipping away, Chinese and Western economic observers say. After promising signs this summer that government austerity measures were slowing down price rises, inflation jumped again in August and September to more than 27 percent. Equally worrying is the trend that raging inflation is no longer limited just to major cities but is spreading into the Chinese countryside.

China is looking to foreign investors, managers, and technicians for help in bailing out its declining state industrial complex. In addition to joint ventures, Chinese state firms are seeking stock market listings to generate capital to make their operations more competitive.

But Cao, the bankruptcy consultant, argues that the government must first sift out the hopeless cases and then liquidate, merge, or sell them to ease pressure on the economy.

Blocking stronger action are not only government fears of unemployment but also objections from local banks, Cao says. In some instances, banks have been instrumental in stopping local governments from enforcing bankruptcy by threatening to cut off future lines of credit, he says.

``One of the reasons for their negative approach is that banks don't have enough funds to write off bad debts,'' Cao explains. ``Bank officials are also afraid that their mistakes ... in handling credit would be exposed.''

Cao says China's bankruptcy law and procedures need to be updated and streamlined, and state enterprises should be given more independence from government officials in declaring insolvency. Still, political obstacles get in the way as enterprises appeal to senior officials for protection, and socialist ideologues insist the state sector remain dominant over private- and foreign-invested companies.

``If a state enterprise is sold to private and overseas companies, the state share will be reduced,'' Cao says. ``Bankruptcy is a way to prevent labor unrest because it's the only way to force some workers to get new jobs.''

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