China's New Mantra: Creditors First

In Beijing's latest move toward a market economy, a new bankruptcy law calls for creditors to be paid before the mainland's venerated workers

Bankruptcy in the People's Republic? And legal guarantees providing creditors with better protection than workers? In a sure sign of how China keeps on changing as it becomes a world economic player and steps beyond its workers' paradise past, Beijing passed a new corporate bankruptcy law on Aug. 27. It ensures better security for capital—and puts China's workers solidly in second place.

The new law, which will take effect next June, replaces a 20-year-old law that only applied to state-owned enterprises and focused mainly on protecting workers' interests. But with China now a member of the World Trade Organization, private enterprise and foreign capital increasingly drive the Chinese economy, the world's fourth-largest. So the new law applies not just to state enterprises but also to private, joint-venture, and foreign enterprises, as well as to financial institutions including banks, securities houses, and insurance firms.

By approving the new law, Chinese policymakers have taken another step in breaking the "iron rice bowl," or lifetime employment system at state enterprises that ensured that bankruptcies were rare and job security was paramount. "China has been making changes to laws related to commercial issues—making them more transparent and writing them with input from both foreign and domestic companies," says Andy Rothman, Shanghai-based China macro strategist at CLSA Asia-Pacific Markets. "It is part of the whole WTO package of having fair and transparent laws [which are] the basis of a market economy."


  The legislation requires that in a corporate bankruptcy creditors be paid first, with the bankrupt company's workers only getting a shot at the remaining assets afterward. A Chinese lawmaker insists that the change won't hurt workers. "The new law embodies the notion of putting people first, as it fully considers workers' interests. At the same time it accords with standard international practice in better protecting lenders' interests," Jia Zhijie, member of the National People's Congress (NPC) Standing Committee, said in an interview with Xinhua, the official news agency.

Some bankruptcies have proceeded in China even without the new law. China's state-owned Assets Supervision and Administration Commission reports that in the last 10 years, 3,658 state companies went under. But that process has usually been more focused on protecting workers and has come at a steep cost to Beijing. Indeed, this year the central government has set aside $4.2 billion to help 2,000 state-owned companies provide for their laid-off employees.

Change doesn't come quickly in China: The law took 12 years to work its way through the NPC. One reason for the delay is that providing for workers has long been a key concern of the government. The number of people employed in state enterprises has fallen dramtically, to around 65 million last year from 113 million in 1996.


  Many have found work in the private sector, but joblessness—and the instability that it causes—remains a major problem. The official urban unemployment rate is 4.2%, but the real rate is widely believed to be much higher, and Beijing has made it clear that workers will continue to receive decent protection. Along with expressly making an exception for the 2,000 state enterprises scheduled to undergo bankruptcy, the law also states that any other government companies declaring bankruptcy before next June will be able to continue favoring workers over creditors in any financial payouts.

"The provision is a compromise that aims to protect both creditors and workers of insolvent enterprises," Cheng Siwei, vice-chairman of the NPC Standing Committee, said in China's state-controlled press. That may be true, but with the new law putting capital over labor, China sends one more signal of its committed conversion to a market economy.