Vol 9 (2012) - Issue 2

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Reform of Chinese Commercial Banks and Relevant Insolvency Legislation

Introduction
Chinese society and its people’s mindset are under the strong influence of Confucian theory. There was an old concept from Confucian theory that 'the son should repay the debts of his father'. This really has a negative effect on bankruptcy legislation. Since debts could pass from one generation to another automatically, there was no need for setting out rules to bankrupt the insolvent individuals because the creditors could enforce their debts by claiming against the debtor’s children who had the ability to repay. After Communist China was founded in October 1949, the first bankruptcy law, Enterprise Bankruptcy Law (for Trial Implementation) (hereinafter referred to as the '1986 law') was enacted in 1986 and came into force in 1988. The 1986 law only applied to state-owned enterprises (SOEs) and it was not clear whether it was applicable to the bankruptcy of state banks. It should be noted that two types of enterprises cannot be declared bankrupt, public utility enterprises and enterprises that have an important relationship to the national economy and the people’s livelihood, for which the relevant government departments grant subsidies or adopt other measures to assist the repayment of debts. State banks surely belong to the latter influencing the economy, capital markets and social stability. This paper focuses on the reforms to the Chinese banking sector particularly after the Reform and Opening up Policy was launched at the end of the 1970s. It then analyses the relevant legislation regarding the bankruptcy of state-owned commercial banks and explores potential problems. 1.

Early situations of state-owned commercial banks
The bank community reforms commenced with the spin-off of the 'big four' state banks from the People’s Bank of China (the central bank) in the initial stage of the economic reform and then the 'big four' were reorganised into wholly state-owned commercial banks which were operated on a profit-and-loss basis. These state-owned banks had previously been subject to government-dictated lending, which meant that the banks had to advance loans to the SOEs directly under administrative orders rather than commercial principles on the basis of market forces, in order to keep the loss-making SOEs away from the brink of insolvency and maintain existing employment to avoid social unrest. Although the government clearly understood that this was simply an expedient, it still directed its solely owned banks to lend for the short-term value of social stability at the cost of the accumulation of nonperforming loans (NPLs). In addition, the repayment of debts owed to state banks was not strongly enforced. Since both the SOEs and banks were owned and operated by the state, metaphorically the enforcement of debts owed to banks seemed like taking money from the left-hand pocket and putting it into the right-hand one. This was why the state banks normally did not have any incentive to claim payment.7 Moreover, in order to ensure social stability, the government’s attitude was rather to sacrifice the interests of state banks for the priority of the social security obligations to the employees in the planned bankruptcy programme.