China bankruptcies rise steadily in 2017 amid 'zombie firm' crackdown

SHANGHAI, Aug 3 (Reuters) - Chinese courts handled more than 4,700 bankruptcy cases in the first seven months of 2017, up “steadily” on the same period of 2016 as Beijing stepped up its campaign against ‘zombie firms’, a senior official with the judiciary said on Thursday.

“The difficulties of launching a bankruptcy case have been effectively eased,” He Xiaorong, a senior director at China’s Supreme People’s Court, told a news briefing.

He said that after 2009, the number of bankruptcy cases in China went into decline with creditors finding it difficult to bring insolvency cases in the courts, but subsequent reforms had improved the situation.

Zombie enterprises are loss-making firms that continue to operate only with the support of government subsidies or soft loans. China promised last year to shut them down as part of supply side reform efforts to rejuvenate its debt-ridden state sector and make better use of its capital, labour and resources.

Senior leadership sources estimated last year that the plans to close zombie enterprises over the 2016-2018 period could involve more than 6 million layoffs, and the government has already introduced special funds to help pay for redundancies.

But China’s inadequate bankruptcy mechanisms have long been regarded as an obstacle when it comes to shutting down loss-making firms, with weak laws and inexperienced courts likely to expose companies to a ‘creditors’ race’ that forces the piecemeal sale of assets.

Executives have also complained the laws leave company bosses personally liable when it comes to repaying debts, making them reluctant to enter bankruptcy proceedings.

The Supreme People’s Court’s He said China had made strides to perfect the country’s bankruptcy system, establishing mechanisms to identify zombie enterprises, handle layoffs and maintain social stability.

He said that a special bankruptcy court set up in 2015 had handled 1,923 cases in the first seven months of 2017, up 28.3 percent compared to the same period of last year.

It now takes an average of 1.7 years to close a business through insolvency procedures in China, better than the East and South Asia average of 2.6 years, according to a report by BMI Research published last week. (Reporting by David Stanway and Engen Tham; Editing by Muralikumar Anantharaman)