Clean up of China’s “Zombie Enterprises” Leads to Surging Bankruptcies


China has seen an ongoing rise in bankruptcies as Beijing steps up efforts to reform the state-owned sector and clean up zombie enterprises.

In the first half of 2018 China saw 6,392 bankruptcy filings and 3,311 bankruptcy adjudications according to figures released by the National Development and Reform Commission (NDRC) at a press conference held on 16 August.

These figures compare to full-year bankruptcy filings of 3,568, 4,081 and 10,195 for 2015, 2016 and 2017 respectively, as well as adjudications of 2,418, 3,373 and 5,712, pointing to continuous gains over the past several years.

According to NDRC efforts to clean up zombie enterprises have played a key role in the rising number of Chinese bankruptcies.

“The zombie enterprise clean up has achieved marked progress,” said NDRC spokesperson Zhao Chenxin (赵辰昕).

“[With regard] to the problem of insufficient ability to judge bankruptcy cases for courts of law at all levels, there has been a major expansion in liquidation and bankruptcy courts, driving a marked increase in the number of lawfully concluded bankruptcy cases.”

Chen Hongwan (陈洪宛), head of NDRC’s fiscal and finance department, said that there has been a sharp increase in the number of liquidation and bankruptcy courts at all levels, with the national number rising to 97.

“Under circumstances where a personal bankruptcy system has yet to be established, despite the large-scale rise in China’s corporate bankruptcy cases over the past two years, the overall number still won’t be too much,” said Li Shuguang (李曙光), chair of the Bankruptcy Law and Corporate Restructuring Research Center of the China University of Political Science and Law to 21st Century Business Herald.

“The US has 94 Federal bankruptcy courts that hear over 1 million cases each year, of which the vast majority are personal bankruptcy cases.

“The goal of the establishment of bankruptcy courts should be to break the protections of local judiciaries…if bankruptcy cases are unable to enjoy independent and fair hearings, then the threat of this to the market economy is even greater than the threat of other civil and commercial issues.”

Further growth in bankruptcy cases is expected, with the release of the “2018 Key Points for Work to Reduce Corporate Leverage Ratio” (2018年降低企业杠杆率工作要点) on 8 August calling for accelerated clearance of zombie enterprises via debt disposal.

Bankruptcies in China have been concentrated in the coastal provinces of Guangdong, Jiangsu and Zhejiang.

Last year Zhejiang came first in China in the number of bankruptcy filings heard and adjudicated at 1,626 and 722 respectively.

Guangdong province saw 1,182 bankruptcy cases in 2017, breaking through the thousand case threshold for the first time and posting YoY growth of 137%.