When the gavel fell last week at the land-rights auction for bankrupt state-owned Guangzhou Cigarette Lighter Factory, it was privately owned Guangdong Beilei Shareholding that raised the winning offer. The firm paid 20 million yuan (about HK$18.61 million) for a 20,576 square metre industrial plot in Guangzhou's Fangcun district. It was an unusual moment, not in the least because the self-styled trading company was forced to outbid a state-owned firm to claim title to the property. Yet the auction was important because it represented a step - albeit a small one - towards the creation of a government-regulated system for liquidating assets held by indebted firms. Bankruptcy has long been frowned upon by mainland leaders and their courts. Between 1989 and last year, there were 16,125 bankruptcies approved in the mainland, with more than 10,700 sanctioned in the past two years alone. Despite the rise in the number of firms going bust, the assets involved represent only a fraction of the amount of mainland property undergoing restructuring. Several factors account for the mainland's aversion to foreclosure, but asset-stripping and the impact of unrecovered losses on domestic banks' balance sheets top the list. Asset-stripping is accomplished in a variety of ways, but often involves factory managers siphoning off the most productive parts of failed enterprises to related firms, or selling property on the cheap to friends and relatives. Bankruptcy proceedings leading to unrecovered lending have become so commonplace that bank objections are often the primary obstacle to completing mainland foreclosures. By edict and custom, banks stand behind enterprise workers and government tax bureaus in collecting whatever funds are raised during the liquidation proceedings. Last year in Guangdong, for example, 49 state-owned firms were closed, involving debt of 2.87 billion yuan, of which bank debt amounted to 1.73 billion yuan. On average, the compensation rate for banks during these bankruptcies amounted to 11.9 per cent, with the highest rate of compensation reaching 42 per cent. Under such circumstances, it is hardly surprising that the state-sponsored auction of bankrupt company land and equipment is eyed with considerable suspicion. Concerns about asset values were echoed by Guangzhou Cigarette Lighter Factory general manager Yan Xilin who, after the land auction, said: 'There was some difference between what [Guangdong Beilei] paid and what [the land] is worth.' Mainland leaders continue to promote structured mergers and acquisitions, rather than auctions, as the way forward. In Guangzhou, that is accomplished primarily at the city's assets exchange, where over the past two years more than 10 firms involving assets of more than 500 million yuan have been sold. Much remains to be done to create a more transparent environment for the sale of property in this way, said Zhang Hongji, general manager of the Guangzhou Property Rights Exchange Centre. Mr Zhang cited measures - including the passage of a national law standardising the transfer of property rights at the mainland's more than 100 municipal asset exchanges - that require immediate attention. However, the greatest drag on asset disposal of failed firms remains popular attitudes. 'The idea that a change of asset ownership is normal is not yet completely accepted,' Mr Zhang said. For the time being, auctions such as the sale Guangzhou Cigarette Lighter Factory last week will remain experimental, and the exception rather than the rule, said an official with Guangzhou's economics commission. Guangzhou was not scheduled to hold another property auction for a bankrupt firm until next year, the official said. 'Settling outstanding debts during a bankruptcy is one reason,' he said. 'But the belief that assets are squandered during auction is just impossible to overcome.'
