Bankruptcy system to be beefed up

China is considering building the personal bankruptcy system and will take measures to root out zombie companies from the market, as part of its greater goal to foster a more efficient economy, said the country's top economic regulator.

The country will promote the establishment of a bankruptcy system for insolvent individuals in a step-by-step way, according to the new reform plan released by the National Development and Reform Commission and 12 other central government agencies.

The plan aims to build a comprehensive personal bankruptcy system by focusing on resolving the joint liabilities arising from corporate bankruptcy and gradually promoting reasonable liability exemptions for individuals, when their consumer debt meets the requirement.

The latest reform move is part of the country's larger efforts to foster high-quality development, which will help deepen supply-side structural reform, improve the market economy and optimize the business environment, said experts and analysts.

"It is the first time that China has proposed a personal bankruptcy system in such a key plan," said Dong Ximiao, a researcher at the National Institution for Finance and Development. "Once formulated, it will remedy the absence of a personal bankruptcy system and improve China's current bankruptcy system. After the establishment of a personal bankruptcy system, the debtor will be given a chance at a new beginning, which is conductive to the optimal allocation and efficient use of resources."

Personal bankruptcy is a legal system under which an insolvent individual who declares bankruptcy distributes all of his or her property in an equitable manner to all creditors, and is exempted from the liability the individual is unable to pay back. China's current bankruptcy system framework is the Enterprise Bankruptcy Law, which ignores natural persons.

"More efforts are needed to improve the credit system of the whole society and the related system, which will help build a comprehensive personal bankruptcy system. Or it may become a means for some individuals to escape debts," said Tang Jianwei, chief researcher at the Financial Research Center of Bank of Communications.

According to Tang, the new plan will help establish an "exit system "for all types of market entities, including natural persons and zombie State-owned enterprises, which will help build a modern market economic system, ensure fair market competition, cut overcapacity and strengthen supply-side structural reform.

Wang Wenhua, a professor at the Law School of Beijing Foreign Studies University, spoke highly of the new reform plan, which she said will keep up with the trends of internationalization and uniformity in legislation.

"The establishment of a personal bankruptcy system is necessary for Chinese legislation to keep pace with that internationally, as personal bankruptcy occupies an important position in the bankruptcy law system of advanced countries worldwide," Wang noted.

"It is conductive to better protect the rights and interests of market entities, stabilize and improve the business environment and promote a healthy and sustainable market economic order."

"The local judiciary and law enforcement agencies also need to take measures accordingly. And the creditors, debtors and liquidators also need to strengthen their own legal awareness," Wang added.