Government intervention in reorganisation of the listed companies in the context of socialist market economy of China

Abstract

Government intervention in the bankruptcy of enterprises is an obstinate problem in the bankruptcy law of China. Since the enactment of the 2006 Enterprise Bankruptcy Law of the People’s Republic of China (2006 EBL) and after this law came into effect, the government has taken an active role in the reorganisation of listed companies. This is the case despite the fact that the 2006 EBL has been greatly modernised with the establishment of a new reorganisation system and an administrator mechanism, and the power of bankruptcy institutions has also been strengthened.

The bridging of the law on paper to its implementation in practice requires a thorough examination of the goals of the government in their intervention of the reorganisation of listed companies in China and their conflicts with the goals of the reorganisation system. The existing literature on government intervention in enterprise bankruptcy is mostly general in nature. Systemic research on the problem of this type of government intervention in the context of socialist market economy in China is lacking. This thesis therefore aims to fill this research gap so as to provide effective means for the implementation of bankruptcy reorganization in China.

In this thesis, theoretical and historical approaches are applied to identify the goals of reorganisation in China, that is, to protect the going-concern value of enterprises and the community interests. Case study is also used as a method to identify the goals, means and effects of government intervention in the reorganisation of listed companies in China.

It is found that the government itself exerts negative impacts onto the bankruptcy institutions and impedes the well-functioning of these institutions which include the creditors’ meeting and committee, administrator mechanism, and the people’s court. The government intervenes by controlling access to the reorganization system, granting substantial amounts of subsidies, dominating the administrator via the liquidation group which is composed of government officials, and controlling the people’s court by cramming down reorganisation plans that have been rejected by creditors (and shareholders in some cases). Government intervention does not result in efficient results: the listed companies do not gain going-concern ability after reorganisation. Many companies experience great difficulties in finishing their asset restructuring. The listing or stock trading of such companies has been suspended for long, unduly squandering market resources. Furthermore, government intervention results in preferential treatment to large shareholders, especially state investor or SOEs. It is argued that the establishment of a comprehensive bankruptcy law is inadequate for discouraging the government from intervening in the reorganisation of listed companies in China. The Communist Party of China and the government should change their ideology and attitudes to sincerely allow the market to have a decisive role in resource allocation. They should therefore bind their “idle” hands and return the power to the bankruptcy institutions to better address the reorganisation of listed companies.