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The adoption of an all-inclusive bankruptcy law is of great and far-reaching significance to the establishment and development of China's market economy.

After 12 years of careful preparation, the Standing Committee of the National People's Congress finally passed a new corporate bankruptcy law on Sunday. It will take effect on June 1, 2007.

With this new bankruptcy law, China is poised to allow the market to assume an even bigger role in raising the overall efficiency of the national economy. As one of the basic laws underpinning the country's market economy, it will standardize and facilitate the exit of failed businesses from the market, enabling the fittest to survive and spring up.

Unlike its predecessor, promulgated in 1986 on a test basis to deal only with state-owned enterprises (SOEs), the new law covers the liquidation of businesses of all types. Every company and enterprise in the country, state-owned or private, will have to follow a unified corporate bankruptcy law if they founder.

Particularly remarkable about the new law are the different approaches it stipulates in addressing historical problems and new bankruptcy cases.

By putting workers before creditors in bankruptcy cases of SOEs that occurred before the new law was published, the legislators demonstrate a firm grasp of the history of the Chinese economy.

While the country has steadily shifted away from central planning in the past two decades, numerous state firms that had accounted for the overwhelming majority of the national economy could hardly stand market competition, nor provide sufficient protection for their workers.

On the other hand, it was not until recent years that the country began to set up a social welfare system, which is still unable to cover all employees from those state-owned enterprises. Under such circumstances, it is certainly necessary to ensure that laid-off workers are paid before creditors when those state firms go to liquidation.

From 1994 to 2005, China allowed 3,658 moribund state enterprises to close with the support of government subsidies. Another 2,000 SOEs specified by the state Council will be closed down with the aid of government bailouts and can pay laid-off workers first.

However, by making these cases an exception, the new law emphasizes the importance of protecting creditors' rights. The new law stipulates that from June 1, 2007, all insolvent enterprises will pay credit guarantees to creditors first, and use other assets not earmarked as credit guarantees to pay laid-off workers.

Undoubtedly, the new law is in line with standard international practice. It will improve the country's legal environment to both cement foreign investors' confidence in the Chinese economy and support domestic enterprises' requirement of market status when they are unfairly charged of dumping in other countries.

Also, the new law will help accelerate the country's financial reforms. In the stock market, failed companies will be de-listed swiftly to allow more capital to flow to those competitive ones. For Chinese banks, which have long been plagued by bad loans, a new bankruptcy law stressing creditors' rights will put them in a more advantageous position to limit the risk and loss of their lending.

More important, the new law has laid a solid foundation for the development of a credit culture in China. A sound credit culture has proven crucial for the growth of a finance-based modern economy.

(China Daily August 29, 2006)