The Chinese government will stop subsidizing state firms which are not solvent on their own in order to improve the efficiency of the country’s economy, the National Development and Reform Commission said on Tuesday.
From now on, both the central and local governments will not be allowed to offer subsidies or loans to state companies which cannot survive without bailouts, also known as “zombie” companies, reports Efe news.
The objective of the plan is to shift resources to sectors where the Chinese economy is showing growth potential and facilitating the closure of such companies.
A circular by the NDRC said that the government should use market tools for allocating resources, standardize competition, reduce market distortions and boost the flow of resources towards more efficient entities.
It added that relevant bodies should not block the exit of state companies which had entered the process of insolvency.
The plan also proposes the establishment of an early warning system for these companies, as well as a legal channel which could be used for restructuring or bankruptcy proceedings of a company.
The reform plan is backed by 13 institutions, including the NDRC, the People’s Bank of China, the Ministry of Finance, and the nation’s Supreme People’s Court.
The final decision regarding the continuation or suspension of subsidies would no longer rest with local officials, who were often reluctant to act due to the companies’ importance to the local economy.
The measure comes just a day after the Chinese government released the lowest growth figures in nearly three decades, registering 6.3 per cent GDP growth during the first quarter of 2019, which points to an economic slowdown in the world’s second biggest economy.