context: Issues with zombie enterprises, or companies that make enough money to keep operating but not enough to pay off debts, re-emerged end 2018 as a top priority, with the state specifying its target to clear up zombies by 2020. This is also the first time that the state has proposed a bankruptcy system for individuals.
On 16 Jul 2019, National Development and Reform Commission and 12 other agencies issued a plan to create a more convenient pathway for entities to exit the market. While market entry rules have been significantly improved with the implementation of the negative list, contradictions and inconsistencies remain in current policies regulating market exits. Meng Wei 孟玮 NDRC spokesperson pointed out challenges, including
- high withdrawal costs
- lack of available channels
- under-developed supporting measures
The new plan targets ‘zombie enterprises’ and prohibits any attempt to impede withdrawal of SOEs qualified for bankruptcy. It bars central and local governments from propping up zombies through subsidies and loans.
SOE debt levels remain high, making up around 60 percent of non-financial corporation debt. Corporate leverage level may drop by around 6 percent if bankruptcy or M&As can properly deal with zombies.
The plan also proposes setting up an individual bankruptcy system, with a special focus on addressing natural persons’ joint liabilities as a result of business bankruptcy. This may discharge certain qualified debts. The rules will
- facilitate the exits of sole proprietorship enterprises and individual businesses
- force financial institutions to be more prudent in consumer lending
Individual bankruptcy, however, does not mean that people can run away from their debts, says Xu Yangguan 徐阳光 Renmin University professor. In exchange for certain debt discharges, debtors will need to either clear part of their debts first or have their economic activities restricted for three to five years.