Bailouts and Bankruptcy law in China: A Confusion of Law and Policy

It is not uncommon for large companies in China, especially SOEs, to be bailed out with government funds or bank loans. This article explores the bailouts of non-financial companies in the country with empirical and theoretical analysis. It finds that the government, especially the local governments are keen to bail out large companies in order to prevent social instability. Also, bailouts in China are still erratic and unprincipled. When bailouts are carried out under the bankruptcy law, legal principles are frequently undermined to the detriment of the creditors. This article argues that bailouts and governmental intervention in general must be constrained with legal principles so that inefficient companies can be closed down and resource can be allocated more efficiently