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China’s top court takes step to kill ‘zombie’ companies

China’s highest court ­ordered intermediate courts in major ­cities to be the first to set up designated tribunals to handle bankruptcies, as authorities step up measures to clean up zombie companies.

Beijing, Shanghai, Tianjin and Chongqing would be the first to establish the bankruptcy and liquidation tribunals, and other major cities would follow as Beijing pressed steadily ahead with its supply-side reform, the Supreme People’s Court said on its website on Thursday, quoting articles in its affiliated People’s Court Daily.

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An unnamed senior official with the top court was quoted as saying that major cities, including the capitals of 11 provinces – Hebei, Jilin, Jiangsu, Zhejiang, Anhui, Shandong, Henan, Hubei, Hunan, Guangdong and Sichuan – would follow suit in the second step. Major cities in the remaining provinces were ordered to finish setting up the tribunals by the end of this year.

“A bankruptcy trial is one of the major means to improve the corporate exit mechanism in ­retiring obsolete production ­capacity and in the winding up of zombie enterprises,” the official said.

Previously, there were no such designated courts. Theoretically, courts at any level, including county ones, were entitled to ­handle bankruptcy cases, though in most cases these courts lacked the capability.

“We see the tribunals as progress on the legal front to beef up the exit channels for companies,” Zhu Xiaosu, a partner at Watson Band Law Offices, said.

“In daily practice, we used to encounter reluctance, partly due to a shortage of manpower or lack of experience or dedication, from local judges in handling bankruptcy or liquidation cases.”

The new tribunals would help ease such headaches, but it would take time to establish a pool of experienced judges, said Zhu, who has been dealing with such cases since 2007, when the mainland’s current Enterprise Bankruptcy Law took effect.

Market watchers said provinces like Zhejiang, Jiangsu and Guangdong were front-runners in handling such cases, thanks to the vitality and openness of their economies.

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In July, a sweeping report on “zombie” firms found that more than half of the nation’s steel mills and nearly half of its ­developers qualified for the title.

The report, by the National Academy of Development and Strategy at Renmin University, also found that the bulk of such firms were state-owned.

Many of them emerged after 2008, when China spent 4 trillion yuan (HK$4.6 trillion) to counter the effects of the global recession.

The report, covering more than 800,000 industrial firms, said at least 7.5 per cent of them were “zombies” in 2013.

The report defined zombie companies as ones that received cheap funding but ran at a loss, or did not generate enough profit to cover their interest payments.

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