China needs independent bankruptcy courts to kill off ‘zombie’ firms, legal expert says

Beijing should make better use of its bankruptcy law to eradicate state-owned “zombie” companies and non-performing assets, a distinguished Chinese professor said, a move that would serve President Xi Jinping’s efforts to restructure the economy and reduce financial risk.

Courts should seek to become more professional and be given greater authority to determine whether firms would benefit from “reorganisation” or should simply be liquidated, said Li Shuguang, dean of the graduate school at China University of Political Science and Law in Beijing.

In the meantime, they should be given greater independence so they can operate without interference from local governments, he told a symposium on deleveraging hosted by the National Institute of Financial Development in the Chinese capital on Thursday.

“We must set up an independent bankruptcy court system, ideally under the existing circuit courts, to prevent local protectionism and defend investors’ interests,” Li said.

Although China has 92 bankruptcy courts – located in major cities across the country – they tend to reject most liquidation requests filed by creditors as a result of pressure from local governments, which prefer to draw up restructuring plans to suit themselves.