In a forum on bankruptcy regulations on Sunday, an official with the State Assets Regulatory and Management Commission (SARMC) announced the government would not interfere in the bankruptcy of State businesses for the next four years.

Although the standardization of China's bankruptcy regulations still have a long way to go, the commission is sending a signal that the government is taking a key step towards real market-oriented bankruptcy practices.

In 1994, the government initiated special bankruptcy practices catering for some lame duck State firms. As well as the normal procedures already given in the bankruptcy law, the government often helps write off bad loans and resettle laid-off workers to shut down companies smoothly.

Known as "policy-oriented bankruptcy," the practice has played a positive role in many ways, in that it accelerates reform of the State sector and avoids social unrest at a time when the social security system is still incomplete.

But government intervention is by no means a thorough cure to problems with many struggling State factories. Such practices add to the government's financial burden, and are liable to drain State assets.

In particular, creditors' interests often have to take a back seat. They run counter to the market system the country is dedicated to, where every business plays fairly and risks are supposed to be within a foreseeable scope under definite rules.

The commission's decision to phase out policy-oriented bankruptcy practices answers the market sentiment that the practice is an interim means rather than the end of the bankruptcy system.

It is worthy of note that the standing committee of the National People's Congress is currently reviewing an amendment to the bankruptcy law, made in 1986.

The law, made up of a number of general stipulations, is not in line with standard practices in many areas, such as authorizing the government, rather than independent professionals, to form liquidation committees. Moreover, it only applies to State companies, whereas non-State firms can only find a few words in the civil procedural law regarding their bankruptcy procedure.

Abandoning policy-oriented bankruptcy is coupled with improving the law as well as the growth of the social security system, all of which will combine to perfect China's bankrupt system in the market spirit.

(China Daily October 19, 2004)