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Monday, September 25, 2006

China and SOEs

As I keep suggesting, now is a very important time to have our fingers on the pulses, as it is clear that the global economy is slowing, while it still isn't clear how much it is slowing.

But in many ways it is a good time to hdge your bets a bit more. This is why the emerging markets are seeing capital outflow. Not entirely unexpectedly China seems also to be giving some serious consideration to how to weather the future. Resistance against short term flexibilisation of the currency would seem to be one indication of this, another comes in this news that:

More than 2,000 of China’s worst-performing state companies have won a stay of execution by being excluded from the country’s new bankruptcy law until the end of 2008.

Since the brunt of the slowdawn may well come in 2007 this would seem to be a pretty wise and perspicacious move. Of course the problem of Non Performing Loans and inefficient enterprises needs to be addressed, but next year may not be exactly the best moment to do this, and the Chinese administration seem to be aware of the fact. This is just one of the reasons I think China (and probably India) will weather the storm much better than most. Quite simply China is still a developing economy, and not yet a full-market one, and this has advantages at times.

Struggling China state companies win stay of execution

The move, aimed at cushioning the social impact on employees of financially strained state companies, will slow the disposal of bad loans held by state banks and distressed debt companies and perhaps also reduce buyout opportunities for foreigners.

The bankrupcty law, passed in August after more than a decade of debate, is seen as crucial stage in China’s reforms as it enables creditors and investors to weed out underperforming companies by filing for bankruptcy to recover at least part of their funds.

However, the law, which is due to come into effect in June 2007, will not apply to 2,116 state-owned enterprises considered at financial risk by the Chinese authorities until at least the end of 2008.

In an interview with the Financial Times, Professor Li Shuguang, one of the authors of the new law, said that for those companies, employees’ health and wage claims would still take precedence over creditors’ claims, an arrangement that had so far slowed restructuring in some sectors.

Estimates of the claims by state employees range from hundreds to thousands of billions of renminbi, China’s currency.

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