INTERVIEW WITH SHENG HUAREN
State Economic and Trade Commission Minister (1)
THE NEW CHINA
Serge Berthier.- China was for a long time a communist country with a communist economy. Then in 1979, reforms were launched. Today, in 1998, it is hard to find an appropriate name for what the Chinese economy is. It is not capitalist, it is not communist. Could you tell us what are the underlying principles guiding the central government in its economic policy?
S.B. - What is the importance of the private sector?
S.H.- One may say that we have now basically an economy where one-third is public, that is state-owned, one third is somewhat mixed, that is with some sort of collective ownership and state-owned ownership, but somehow privately managed, and the last third is privately owned and privately managed (3). Since the opening up of China which emphasized the need for different types of ownership systems, they have developed rapidly under different forms.
S.B.- In the past, the economy was very much centralized. Nowadays, market forces and private capital play an increasing role in the way the economy behaves. The State Economic and Trade commission supervises all sectors of the economy. What is its main task?
S.H.- Its role is to manage the macro-economic aspects of the whole economy. We have to manage them so that there is no tension between the market forces and the goals of the government, that they complement one another.
S.B.- How is that done?
S.H.- What the central government does is that it supervises the economic situation of China at the macro-economic level. We look at the total numbers and at their components. Are they consistent? This is where the relations between the central governments and the local governments manifest themselves. Such analysis is the basis for the allocation of the resources on the market.
S.B.- In a purely capitalist economy, economists tend to say that the market is the best judge as regards the allocation of resources. If the market is not entirely responsible for the allocation of resources, waste might creep in and slowly render the economy inefficient. Why would a government allocate resources? Don't you think that it could be left to the market forces?
S.H.- Governments are always responsible for the definition of the development program. The central government has targets of development. It represents the whole country. In doing so, only the central government can stress the need to reduce disparities, to preserve a general economic balance throughout the nation, to build and cultivate a national unified market, etc. What it means practically is that, while the central government is concerned by the macro-economic balance, the need to reduce disparities and the need to cultivate a national unified market, local governments put more emphasis on the development of the local economy, the labour market, inflation, the growth of disposable income, etc… (4). Now, we do need to monitor the targets and the allocation of resources, which as you mention, can be wasted. In China, it is not the central government which is in charge of implementing the policies, it is the local governments. They are also responsible for gathering information on what is actually happening. So we have different levels of responsibilities, one at the national level, one at the local level, and we even have different levels of management of the economic resources since there are various forms of ownership.
S.B.- Economics is about numbers. How does what you describe translate into visible numbers which allow one to gauge the efficiency of the policies?
S.B.- How are these shared?
S.H.- Part of fiscal resources go entirely to the central government, part of it is returned entirely to local governments and some is shared between the two. The central and local governments can therefore evaluate one another.
S.B.- What are the objectives of the economic actions pushed through by your government?
S.H.- The long term goal is of course to build a more complete socialist market economy, to ensure its fast and healthy growth, to enhance national stability. Prime minister Zhu Rongji sums up the targets with the formula “one guarantee, three phases, five reforms”.
S.B.- What guarantee?
S.H.- That in 1998, Chinese economic development will reach 8%, while the inflation rate will be kept under 3%.
S.B.- Many analysts doubt whether China can still reach 8% growth…
S.B.- What about the yuan?
S.H.- The yuan will not devalue.
S.B.- What are the three phases?
S.H.- Firstly to extricate most big and medium size state owned companies from their awkward situation, secondly to strengthen Chinese legal system, thirdly to reorganize government structures and the civil service.
S.B.- What are the five economic reforms you mentioned?
S.H.- The reforms of the food distribution system (7), of the investment and financial system (8), of the housing system, of the medical system, and of the public finance and fiscal system. The measures that the government is currently implementing all revolve around the goal of implementing these reforms.
S.B.- Foreign investments have slowed down considerably this year, admittedly because of the global situation. What is the government trying to do about it?
S.H.- We pay extreme attention to the investment environment, especially because it is a weak point. We have already promulgated a new set of guidelines (9). At the same time, in order to favour and support foreign investments, the government decided that starting from January 1, 1998, there would be some tax exemptions on imports. China will also stimulate foreign investments in its inner provinces, stimulate foreign investors who initiate exports and those that expand their exports. According to the socialist market economy and to international markets regulations, China will improve its regulation on the use of foreign investments and improve the transparency and unity of its policies.
S.B.- You said earlier that the Prime Minister guarantees that the growth rate of the economy will be 8% in 1998. In the first six months of the year. China was lagging behind such a target. What would be the problem if the growth rate was only 7%?
S.H.- Under international and domestic influences, Chinese economic growth slowed down in the first part of the year, but compared with the world’s average growth rate, it is still very fast. China will firmly stick to its 8% economic growth target because it is what is needed to develop the economy. So, to reach such target, we have adopted measures to use more effectively our financial resources to increase investments in fixed assets (10). The measures also aim at boosting domestic demand. We have also implemented measures to boost external trade, and to crack down on smuggling (11). Among the reforms well under way, there is the reform of the food distribution system which will enhance economic intercourse and therefore induce economic growth. You also know that we are strengthening the banking system. All these will improve the economic environment.
S.B.- Year after year, one of the intractable problems of the economic system in China has been the inefficiency of State-owned enterprises. It is still one of the three goals to pull them out of what you call their awkward situation. Can we believe that the inefficient ones will have disappeared in three years time?
S.H.- During the last few years, as a result of a shift towards a socialist market economy, the state-owned companies results worsened. The Chinese government knew it was a problem and so implemented a series of policy measures. The direction and target of the reform has always been clear and final (12). To improve their results, such enterprises have to modernize and to lay off workers. Regarding the important points of the reform, some solutions have been found. Experimental systems have been put in place. Step by step, ways to bear the cost of reform were found. The ability of companies, workers and society at large to endure improved a lot. The perspective for laid-off workers to find a new job became better. The social security system is also improving step by step. It is indeed a real fight to help most Chinese state-owned enterprises overcome their difficulties before the end of the century, but we can say that after years of relentless efforts, the reform, which is a tremendous challenge, is giving satisfactory results. The reform has in fact accelerated their developments and improved their overall strength. As a whole, the benefits of such reform are starting to show. A large number of outstanding companies, being of utmost importance for the national economy and social progress, have emerged on the economic scene. And that is good news.
S.B.- Massive investments in infrastructure can for a while reduce unemployment. However the return of migrant workers to their rural homes is creating social tensions. Taking into account the global slowdown of the growth rate, what can be done to alleviate the social tensions in the countryside?
S.H.- The Chinese population is now more than 1.2 billion, of which about 900 million live in the countryside. The population that is in the workforce age group is more than 800 million, from which 600 million live in the countryside. According to a ministry survey, the surplus workforce is about 100 million. This has always been a problem (13). In order to promote the employment of these people, we have formulated a series of policy measures to facilitate the development of businesses in rural towns. New small towns have been created. Policies have been put in place to promote the mechanization and the modernization of agriculture but also the industrialization of rural areas. What we are trying to achieve is to create the opportunity for the surplus workforce to have a job where they are or in nearby areas. We want to prevent the population moving around too much.
S.B.- Is it working?
S.H.- Yes. Since the 80’s, the companies set up by Chinese peasants not only developed the rural economy and increased their income, but they also eased the problem of surplus workforce. At present, rural companies provide jobs to about 130 million people. Regarding the workforce surplus, the government’s guiding principle is “leave agriculture, not countryside”. The goal is to develop companies and services relying on local resources and have the workforce surplus digested on the spot, as an appropriate way to tackle the problem.
S.B.- The growth rate of exportation has slowed down. Can the export-oriented enterprises turn their production to the need of the internal market? Is such a policy advisable and sustainable?
S.H.- Due to the influence of the Asian financial crisis, the increase rate of Chinese external trade and exports slowed down in the first half of 1998, putting a halt in May 1998 to the regular increase in exports of the previous twenty two months. In order to overcome the harmful influence of the financial crisis, we have increased the number of export items that enjoy tax rate cuts. The companies that export goods have been given more autonomy in one way or another. In general the enterprises have been reacting positively to the new economic environment they are facing. They have to look for new markets, new opportunities. They have to diversify, to improve the quality of their products. It is healthy as long as they are able to compete and that the trend is there to prove that the exports are still growing. And so far, we have satisfactory figures taking into account the worldwide situation. In spite of weakening exportation to ASEAN, South Korea and Japan, we register a 7.6% growth rate for the whole of our exportation between January and July, with increasing exportation to the United States, Europe and South America. In fact, it might sound paradoxical, but the export companies are sharper today than yesterday, and they are better positioned to take advantage of any opportunity that may occur. So the need to turn to the internal market is not really there. They have nevertheless to constantly adapt to a very fluid situation given the current state of the world economy (14).
S.B.- As a consequence of the state-owned enterprise reform, many of them will go bankrupt, increasing significantly the burden of doubtful and bad debts for national and commercial banks. This was the reason for several international rating agencies to downgrade major Chinese banks. What will, in your view, be the effect on the economy?
S.H.- Chinese state-owned enterprises' important bad debts, together with state commercial banks creditor’s losses, is one of the most serious problems that Chinese economic development is facing. Not only did it affect the normal management of enterprises and made the state-owned enterprises fall into a bad results spiral, but it also increased dramatically banks credit risks and seriously hindered the reform of enterprises themselves and the move to make state-owned commercial banks market oriented. We are learning the lessons of the current financial crisis and so the government is now forcefully pushing the financial reform. The main aspect of the reform of the banks' management system is to reinforce the central bank’s supervision over the credit management of all the financial structures. The Central Bank has already formulated a classification to evaluate the quality of loans and assets and found some ways to examine them. Before the end of the year, all Chinese banks have to initiate the implementation of a five levels assets classification. When this is done, it will be possible to gradually reduce the ratio of non-performing loans in state-owned commercial banks.
S.H.- The core of the reform is to refer to the expertise and the advanced techniques and wide experience of international banks on managing assets. But such exercise can be done only by keeping in mind the characteristics of China's situation.
S.B.- What do you mean? A bad loan is a bad loan, whether in China or elsewhere, don't you agree?
S.H.- Not so long ago, some foreign agencies were very critical about Chinese banks loan evaluation problem. Some reported that Chinese state-owned commercial banks bad loans accounted for 25%, or even 40% of the total loans. They also called non-performing loans “bad debts”. These reports definitely do not tally with facts. China will separate normal loans and non-performing loans. Non-performing loans will then be divided into three categories: those which are overdue and are therefore considered non-performing, those which are overdue for more than two years and are therefore doubtful, those which are irrecoverable because the enterprise is bankrupt or the debtor is dead. Those are clearly bad loans that you have to write off. For a long time, China has been classifying non-performing loans according to whether they are settled on time or not. It means that the loans have different problems, and not that all of them are unrecoverable.
S.B.- Most of the time, when a loan remains overdue for many years, it is in fact unrecoverable. Why would the situation be different in China?
S.H.- The point is that Chinese enterprises are not easily bankrupt (15). That means that actually very few loans are unrecoverable. At present, the bad loans that the commercial banks need to write off account for approximately 2% of all loans. Besides, if you add to these loans 40 to 50% of the doubtful loans that will become unrecoverable, the total of unrecoverable loans is about 6% of all loans. The main reason why the rate of overdue loans is rather high is that most of the time the state-owned enterprises' paid-up capital and reserves are very low. Furthermore some enterprises experience serious cash-flow deficits for one reason or another.
S.B.- Nevertheless, whether the loan is doubtful or lost, whatever the definition, it means that the banks will bleed badly if they can't recover the money. From what you say, one way to clear their balance sheets would be to inject some money in the state-owned companies, by increased capital for example, so that they would then be in a position to clear their overdue loans. Another way is to directly inject the money in the banks and write off the loans. What are you going to do and how much money is needed to purge the system?
S.H.- Starting from 1997, we asked each bank to make a provision of 1% of the total loans and so to clear, as irrecoverable loans, the same amount. It means actually that every year the banking system is writing off about 40 billion yuan worth of bad loans that they had on their books. Then, in July 1998, after the Permanent Committee of National People's Congress approved the decision, the Finance Ministry issued 270 billion yuan worth of national bonds, which will serve to recapitalize the state-owned commercial banks. For their part, the banks will then be able to write off the irrevocable bad debts. Once the operation is completed, the state-owned commercial banks adequacy ratio will reach the BIS requirement of 8%.
S.B.- In other words, you consider that the total amount of irrecoverable loans is in the range of 270 billion yuan plus about 40 billion yuan a year. How do we know this is an accurate figure, the classification being not yet completed and compiled?
S.H.- Chinese enterprises are not easily bankrupt. Only a small percentage of loans are technically irrecoverable. However the Central Bank has already decided that, before the end of 1998, it would classify loans according to international practice. It will reinforce management and supervision of the credit risk. Commercial banks have been urged to establish a better internal control system and to work exclusively on a commercial basis with a better risk control. From now on, the proportion of overdue loans on their books must drop by 2 to 3% every year. We want, at the beginning of the next century, the main operational concept standard of the state-owned commercial banks to be on pair with their international counterparts and their financial strength to be on equal footing.
S.B.- What did you learn from the financial crisis which now is seen as a breakdown of an outmoded international financial system, rather than just an endemic "Asian flu"?
S.H.- First, let me say that the Asian financial crisis did not have a direct impact on China, but nevertheless we can feel the turbulence. China made positive contributions to attenuate the effects of the Asian financial crisis, especially by promising not to devalue its currency. There was a price that China paid. As the Southeast Asian Nations significantly reduced their imports, the Chinese foreign trade and exports growth rate fell in the first six months of 1998 and the commercial surplus was sharply reduced. With the Asian currencies devaluation, China has to compete with largely cheaper goods, and it also caused difficulties to some Chinese enterprises. In the first half of the year, the GDP increased by only 7%, and didn’t reach the target, as you know…
S.B.- Yes, but regardless, you feel that 8% will be achieved, so the effect was not so important.
S.H.- This is because the development of the Chinese economy mainly depends on domestic market. It is one thing that is easily forgotten. The Chinese economy is 80% a domestic one and only 20% an international one.
S.B.- What was the economic area that was most affected by the Asian melt-down?
S.H.- External investment. At the beginning of the year, South East Asian countries suddenly reduced their investments in China and overall foreign investments were sharply reduced, we didn’t achieve what we hoped. However, due to an important rise in European and American investments, we forecast that 1998 total foreign investment will nevertheless surpass last year’s (16).
S.B.- Beyond the necessary adjustments made because of external factors affecting the growth rate of the economy, has the Chinese government changed its mind about something to take into account the lesson of the crisis?
S.H.- Yes. Learning from the experience of the Asian Financial crisis, China is now taking positive measures to deepen and accelerate the reform of the financial system. Reinforcing the financial supervision and consolidating financial order is a priority. The government reinforced the central bank’s financial control and supervision ability. It is also speeding the process by which it gives more autonomy and independence to the national commercial banks along commercial norms. Within three years, China will have a financial system that suits the socialist market economy system, a financial market and a financial supervision system up to international standards. What we learned is that, in order to safeguard financial stability, you must be vigilant.
S.B.-What is your opinion on the euro?
S.H.- The euro will start next year as a new official currency. The GDP of the euro-zone countries accounts for 19.4% of the world economy, its trade for 18.6%. The creation of the euro will trigger some change in the world currency reserves in settlements organization and currencies change patterns. Thus, it will influence the world economy and trade. At present, 48% of world trade is settled in dollars. With an enormous trade volume in the background of the euro, its creation will trigger some change in the present role of the dollar in the international economy. The euro will bring some new opportunities and challenges to world trade. In our view, it will firstly dispel the friction caused by currency related matters within the euro-zone, then outside. Working in a more stable environment, international investments should increase, which should enhance the prospect for economic growth. The euro will also bring a better trade environment to every country. At the same time, it will reduce the currency exchange cost that is currently affecting European companies. It will in a way enhance their competitiveness and help them to broaden their reach. In China, we expect the euro to bring a very important change in our foreign trade. The EU, with euro-zone at its core, is China’s fourth commercial partner, behind Japan, the USA and Hong Kong. In 1997, the total China-Europe trade reached 43 billion US$, an 8.3% increase from 1996, and accounted for 13.2% of total Chinese exports. With the introduction of the euro and its role in international contracts as a settlement currency, the Chinese companies will be in a position to improve their use of their foreign capital. They will have to adjust but it will certainly strengthen their international competitiveness.
1- In March 1998, the new government of Prime Minister Zhu Rongji announced that, in order to slim down bureaucracy and achieve better efficiency, it would eliminate or merge 15 ministries and create four new ones. The State Economic and Trade Commission (SETC), chaired by Sheng Huaren, has been made one of the key ministries. The SETC includes: bureau of Coal Industry (former ministry), bureau of Machine Building Industry (former ministry), bureau of Metallurgical Industry (former ministry), bureau of Internal Trade (former ministry), bureau of Light Industry (former national council), bureau of Textile Industry (former national council), bureau of Grain Administration (former State Grain Reserve Administration), former Ministry of Chemical Industry, former Ministry of Power Industry, China National Petroleum Corp., China National Petrochemical Corp.
2- Prior to 1988, there was no legal status for any other enterprise than a public enterprise. In April 1988, an "Enterprise Law" was enacted, coming in effect in August 1988. The central government issued further "Regulations on changing the management mechanism of industrial enterprises owned by whole people" in June 1992. Then, in November 1993, the Communist Party adopted a 50 points resolution on building a "socialist market economy" in which the first reform was the building of a modern enterprise system which opened the door officially to the private system alongside a collective sector and a public sector.
3-Such division does not give an accurate picture of the economic system. In terms of output, the 305,000 public enterprises (out of which 100,000 are state-owned and the rest collectively owned enterprises) dominate the economy, but they are steadily losing their market share. In terms of employment, they employ 70% of the urban workforce (109 million). However state-owned enterprises no longer create jobs. In 1998, it is expected that they will shed about 10 million jobs. In contrast, although the private sector accounts for only 11.3% of the GDP, it grew in 1997 by 22%. By the end of 1997 (last statistic), China had roughly 29.5 million private companies employing 68 million people. Collectively owned enterprises account for more than 40% of industrial output and employ about 25% of industrial workers. In term of profitability, the private joint-ventures and other private enterprises generate 99% of industrial profits. State enterprises generate only 1% of the total.
Minister Sheng is therefore taking the long-term view when he says that the Chinese economy is basically made of a state-owned sector, a mixed sector and a private sector of equal size. That will be the case when, as it has been decided, the state-owned sector will be sized down to a core of 1,000 large companies. The remaining 304,000 small and medium-sized public enterprises will be released from state ownership. They will then blend with the other sectors, or for a great number, close. Nevertheless, today, the weight of the public sector (which includes state-owned enterprises where the central government or the provincial and municipal governments are the sole owner as well as the collectively owned enterprises, such as township enterprises) is still close to 70% of GDP.
4 - This comment may explain the apparent contradiction in some actions by the government. While pushing for reforms, the State Economic and Trade Commission has told in July 1998 the local governments to curb "the prevalence of selling small state-owned enterprises" because the short gain made (the disappearance of badly managed companies) would be lost by a negative impact on local economic development and social stability and the relocation of laid-off workers.
5. This is partly true but as there is no law that defines clearly local governments' legitimate share of national revenue the sharing system is subject to constant political lobbying. It is a consequence of the Byzantine administrative division of China between cities, county, township (xiang) and towns (zhen). Only residents of the administrative towns are counted as "urban" class according to the household registration system that was established in 1949. In May 1993, the government doubled the number of population and the per capita output value needed for a administrative town to become a city, which gives the local governments different financial advantages and arrangements in the sharing of the national revenue. In 1949, China had only 168 urban centres which were called cities. Only 25 new cities emerged (in name) between 1949 and 1978, but then from 1979 to 1993, China created 377 cities out of former agricultural counties. Then in 1994 alone, 50 new cities were made, and the trend is continuing. One Chinese out of three live today in a city, the "urban" population of China is about 400 million people. Cities account for about 60% of the gross national product and 79% of tax revenues.
The government is now at the stage where it must prevent the urbanization process from running at the cost of agriculture, and new zoning laws are currently being studied to protect the arable lands from being "urbanized". There are in China more than 35,000 "towns" that, although already being local commercial hubs with a high-density population, are still without a formal municipal administration, while the number of administrative towns with their own municipal government is around 16,000 (2,700 only in 1984).
6 - In the first half of 1998, the growth rate was only 7%. Then the government introduced a reflation package intended to boost capital investments and consumer demand. In September, value added industrial output rose 10.2%, a progression of 2.3% compared to August. As a result, for the first nine months of 1998, the value-added output rose to the intended 8% target. The government predicts even a faster growth in the last quarter of 1998. Retail sales of consumer goods are also meeting the target growth after lagging behind for the first part of the year, increasing 13% in August (and 9.5% after factoring negative retail price inflation as retail prices have fallen 11 months in a row, and are not expected to recover before 1999 as a result of over-capacity and over-supply). In the first seven months, real growth has reached 10% (and 7.7% after deflation), a figure that led the government to say that retail sales have met the targeted level of contribution to economic growth.
7 - In May 1998, the State Council banned all private enterprises and vendors from buying grain directly from peasants, which had been allowed since 1993. The move was designed to root out corruption in the state's grain-distribution system and to stop the decline of the prices engineered by bumper harvests, year after year. Yet in July, the Prime Minister, Zhu Rongji, modified again earlier grain reforms to boost prices and help cash-strapped farmers. Under China's grain distribution system, the lifeblood of a rural economy that supports about 900 million people, only state-agencies have the right to buy and sell rice, corn, wheat and other grains. But in the early nineties, when state-set prices were artificially low, the farmers started to sold to private dealers who paid market prices. Today, an audit of the state grain bureau has revealed that out of 543.1 billion yuan earmarked for the purchase of grain in the past six years, only 329.1 billion have been accounted for. In addition to a reform of the state grain bureau, the government is also studying a reform of the Commodities Futures Industry in an attempt to defeat the wide spread speculation that has wrought havoc on grain and commodities futures. The number of official exchanges will be reduced to 3 from 14 and the commodities to be traded reduced to 12 from 35. The reform should be in place early 1999.
8- See interview with Liu Mingkang.
9 - The foreign investment guidelines published in June 1995 have been updated on January 1st, 1998. The guidelines detail which areas are open to foreign investment and, in particular, spell out which project areas are "encouraged", "restricted", or "prohibited". In the encouraged category, officials emphasized advanced technology projects, as well as environment-friendly technologies and energy sources. Significantly, in view of the currency turmoil surrounding Asia, the forbidden category includes derivative financial business such as commodity futures.
10 - In early February 1998, Chinese Vice-Premier Li Lanqing announced a multi billion yuan infrastructure plan for the next three years. Fixed-assets investments growth, which had dropped to 9% in 1997 from 12.5% in 1996, and 18% in the early 90s, remained however subdued in the first part of 1998. Then, at the end of August 1998, the Finance Minister, Xiang Huaicheng, told a meeting of the National People's Congress that the government would launch before the end of the year 100 billion yuan in long-term bonds to be used for infrastructure projects.
12 - The State Commission for Restructuring the Economic Systems, which was established in 1982 and reorganized in 1998, worked on a reform agenda of the state-owned enterprises as early as in the 1980s, but according to Vice-Minister Wu jie (see Asian Affairs volume 1 nș1), "Before 1994, we did not have the necessary environment to carry out in-depth reforms of the state sector. We had first to carry out the reform of fiscal, financial, foreign trade and foreign exchange systems."
13 - Statistical data about employment are numerous but none have published the numbers mentioned by Minister Sheng. In 1994, the Ministry of Agriculture estimated that there were about 430 million laborers in rural areas, whereas only 130 million were actually needed to tend the crops in the fields. These numbers imply a surplus workforce of about 300 million.
According to a study by officials at the State Commission for Restructuring the Economic Systems published in 1996, for the 1996-2010 period, China has to create at least 18.6 million jobs each year when the growth in the working population and those seeking reemployment are taken into account. According to Zeng Peyan, minister of the State Planning Commission, an 8% GDP growth is necessary to create such level of employment opportunities, maintain social stability and shore up domestic and international confidence.
Latest available statistics in 1998 put at 696 million the total employed workforce, with rural workforce at 494 million, urban workforce at 202 million, state-owned enterprises workforce at 110 million and migrant workers at 40 million. Hence if Minister Sheng estimate is correct, out of a potential workforce of 900 million, more than 200 million are either underemployed or unemployed.
14 - The trade surplus at the end of August 1998 was US$31.38 billion, up 22.7% from the same period last year. In the first eight months, exports rose 5.5% year on year, imports rose only marginally 0.4%. September exports fell by 6.7% bringing down the increase in nine months to only 3.9% at US$134.13 billion. The imports rose marginally to US$98.82 billion during the same period, leaving a US$35.3 billion surplus.
15 - For several decades after the founding of the People Republic of China, the Chinese firmly believed that a state-owned enterprise in a socialist country could never go bankrupt. It explains that China did not have a Bankruptcy law until 1986. which only came into effect in 1988. In September 1997, the law was redrafted and expanded from 47 articles to 193. Nevertheless, state-owned enterprises are most of the time bailed-out in such a way that bankruptcy proceedings remain an exception. What Minister Sheng emphasizes is that the State acts in such a way that there is no default. Two cases illustrate his remark, the first one is the closure of the Hainan Development Bank in July 1998, the second the closure of Gitic in October 1998. In both case, the accumulated debts were transferred to another institution and therefore it can be argued that the creditors were not affected as they would have been if bankruptcy proceedings had started. But if such institutions are considered too big to fail, thousands of small and middle-size state-owned enterprises have defaulted on their debts when closing down (see article by Philippe Delhaise).