China Economic Review: Central bank unwilling to pay debt left by closed financial companies
9/5/2005 17:06
China's central bank is unwilling to pay off large debts owned by bankrupt
financial companies and is working on related financial provisions, its Vice
Governor Xiang Junbo was quoted by the Economic Reference as saying.
China's
stock markets, which have been bearish since 2001, have triggered the closing of
some securities firms, including the Guangdong International Trust &
Investment Corporation and Nanfang Bonds Company. The People's Bank of China
(PBC), the central bank of the country, paid much of their enormous debts to
protect the interest of individual investors.
There is no specific law in
China targeting the bankruptcy of financial institutions, although the country
passed a trial bankruptcy law in 1986.
Some argue that bankruptcy of
financial companies should be treated the same as ordinary companies. Other
experts say financial companies are different owing to their large number of
individual investors and depositors, so their bankruptcy debts have to be paid
by the central bank.
It is vital for China to make special laws on bankruptcy
of financial institutions, which borrow huge amount of money from the ordinary
people, Prof. Meng Fanchao with the Department of Law of the Nanjing University
of Aeronautics and Astronautics was quoted by the Economic Reference as
saying.
Chen Xiaoyun, director of the central bank's law department, said in
early April that PBC is doing some research work on draft of bankruptcy
provisions concerning financial institutions.
"The bankruptcy process of
financial institutions, relating to financial stability and public interest
protection, should be participated in by finance supervisory departments," Chen
said.
The central bank wants to shift off the burden through the enforcement
of new laws and establishment of a more reasonable system with regard to
financial bankruptcy. Senior officials of the PBC have again claimed that the
bank will not continue indefinitely to pay back the debts of bankrupted
financial companies, according to the Economic Reference.
But some experts
query the central bank's right to make such laws. According to China's law on
legislation, it is the National People's Congress (NPC) and its Standing
Committee that have the right to draft laws on basic financial systems, said
Meng.
Others doubt the possibility and feasibility of enacting such laws
under current conditions. Even China's new corporate bankruptcy law bill, which
has been in preparation for over a decade, still faces too many difficulties and
obstacles before becoming a real law.
According to the 1986 corporate
bankruptcy law, which only regulated bankruptcy of state-owned enterprises
(SOEs), money recovered from insolvent SOEs was not to pay creditors. First the
money went to the unemployed, with the leftovers going to creditors, or
state-owned banks.
In 1994, the new corporate bankruptcy law was begun to be
drafted. It was not submitted to NPC Standing Committee for the fear that the
new law may lead to massive close-down of SOEs, leaving behind a large number of
the unemployed. It is still hard to predict when the new bankruptcy law will be
adopted.
"There is no need to enact a special law on financial companies, and
those provisions on financial companies should be included in the new corporate
bankruptcy law, as financial companies are still companies," Yi Xianrong, a
finance expert with the Chinese Academy of Social Sciences was quoted by the
Economic Reference as saying.
Since the bankruptcy issue is sensitive and in
the interests of numerous different groups, there is a long way to go before a
new system is established for the bankruptcy of financial companies in China.
Xinhua News
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