China should let more ailing firms fail - deputy c.bank governor

BEIJING, July 8 Tue Jul 8, 2014 12:51am EDT

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BEIJING, July 8 (Reuters) - China should let more ailing firms go bankrupt to help improve economic mechanisms rather than allow them to get government-led bailouts, a deputy central bank governor said on Tuesday.

The risk of corporate failures is rising as economic growth slows and the government tries to put a lid on high debt levels in the economy to help ward off financial risks.

"In the course of our surveys, we found that many companies are in the zombie state but they have taken up a large amount of credit," Liu Shiyu told a forum in Beijing.

He urged companies in the coal, steel, machinery and shipbuilding sectors to find ways out of business difficulties, including using a bankruptcy law introduced in 2007.

Local government officials generally mediate between creditors behind closed doors and Beijing has used the law cautiously, fearing the failure of large firms and widespread layoffs could lead to social unrest.

The number of bankruptcies handled by Chinese courts fell to 1,920 last year from 10,000 a few years ago, Liu added.

"When some large companies run into difficulties, creditors and companies are counting on the government to take the lead in administrative settlements," Liu said, warning that government-led bailouts could lead to the "misuse of resources".

In a report issued last month, the central bank blamed some low-efficiency industries and companies for "crowding out" funding for small firms and pledged to improve liquidity and risk management.

Average non-performing loan ratios at Chinese commercial banks hit a three-year high of 1.04 percent in the first quarter. Given the opacity of the banking system, many analysts believe real levels are much higher. (Reporting by Kevin Yao; Editing by Alan Raybould)

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