Thousands of loss-making state-owned enterprises (SOEs) will be declared bankrupt in the next few years as China's regulators accelerate their asset restructuring program.

The move is the latest attempt to restructure and revive state-owned companies, following a government reshuffle that led to the founding of the State-owned Assets Supervision and Administration Commission (SASAC) earlier this year.

Under the program, thousands of state companies will be declared bankrupt over four to five years, and any recovered income will mostly go towards supporting laid-off workers of the firms.

A source with the Enterprises Restructuring Bureau under SASAC told China Business Weekly about 2,000-3,000 companies are scheduled for bankruptcy within the five-year period.

He confirmed many of the companies are state-owned firms in "sunset industries" that have suffered long-term losses due to poor management, outdated skills and technologies.

SASAC Director Li Rongrong said earlier in July at a work conference the state would speed up policy-mandated bankruptcies of state-owned enterprises (SOEs).

"Some 10 percent of those companies are depleted SOEs located in remote mountain areas that rely on natural resources, such as ore-mining. Most of them could not become profitable again through restructuring," said Beijing Youth Daily early last week.

According to the bureau source, who declined to be identified, more than 200 military companies are among those on the bankruptcy list.

Previously, such firms stopped trading under China's bankruptcy law.

The Bankruptcy Law, which was drafted in 1986 and took effect in 1988, is largely obsolete today due to its obscure clauses and poor supervision.

Its inadequacies have given rise to calls for a new, substitute law. The State Council issued a provision in 1997 to shore up bankruptcy activities before a new law is introduced.

The provision requires income generated from bankruptcies to first be used to fund assistance to workers in the company.

"And disposal of these companies, which are mostly long-term loss-making companies, will be carried out through public bidding and negotiations," said another source with the SASAC's Enterprises Restructuring Bureau, which is responsible for drafting rules for restructuring of state-owned companies.

Foreign and private funds or companies are now welcome as the government becomes more aggressive in reshaping State assets.

"There are no restrictions on foreign and private companies that want to buy stakes in restructuring State-owned companies," said Lu Hao, vice-mayor of Beijing. As of mid-July, the capital had listed 104 key industrial enterprises that foreign and domestic companies could acquire.

SASAC, a new super-ministry affiliated to the State Council, combines functions of the former State Economic and Trade Commission, Working Committee of SOEs directly affiliated to the central government, and Ministry of Finance.

The bureau is responsible for supervising and managing the country's State-owned assets. But it is not allowed to intervene directly in State firm's business operations.

"It is very hard to differentiate between normal supervision and unwanted intervention under the current system," said Qiao Xinsheng, a financial professor.

The commission introduced a long-awaited provision governing the supervision of State-owned assets earlier this year, setting the ground rules for their management.

The central government will help firms still in the red after being declared bankrupt to assist laid-off workers.

The source said local SASAC branches and the local government will decide what style of settlement will apply to these companies, either through public bidding or negotiations.

He said both foreign and private sectors could participate in bidding for those bankrupt companies.

"In fact, in 1997 we initiated a trial program to let loss-making companies go bankrupt in about 10 cities, and it has since been extended to over 50 cities," the source said.

He told China Business Weekly the key priority for companies that go bankrupt is the welfare of laid-off workers.

China has always been reluctant to dismantle failing SOEs because of the resulting staff redundancies and possibility of social unrest.

However, SOEs that declare bankruptcy will enjoy preferential policies in finding new jobs for their employees and restructuring their subsidies and taxes, the Beijing Youth Daily reported.

For example, they will be allowed to sell their land and assets in exchange for staff relocation funds. The government will even provide subsidies if the company does not have enough money to help its laid-off employees, the source confirmed.

The reform of China's thousands of state-owned companies is one of the biggest tasks China's central government faces. But it is also the trickiest, given the need to provide a safety net for redundant workers to prevent public discontent.

Some state-owned companies, once labeled pillars of China's economy, have lost their luster in recent years due to poor management, inefficiency and pressure from private and foreign firms.

From 1995 and 2002, 7,798 SOEs went bankrupt. But SASAC said, by the end of 2002, there were still 159,000 state-owned or state-controlled industrial and commercial enterprises, with an overall asset volume of 18 trillion yuan (US$2.2 trillion).

SASAC, which represents the state as owner of the assets, now directly supervises 191 of China's biggest SOEs, including the market leaders in some sectors. Local SOEs are supervised by local State asset-management agencies, which are also under SASAC's control.

(China Business Weekly, August 3, 2003)