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BEIJING (MNI)

China needs tailored legislation to regulate the bankruptcy of financial institutions, many of which have been hit by the Covid-19 pandemic, two People's Bank of China officials told MNI, calling for the roles of regulators and other major stakeholders to be legally clarified to permit orderly resolution and limit damage to the economy from failures in the sector.

Whilst the National People's Congress last week identified revision of the Enterprise Bankruptcy Law as a key task for the top legislative body this year, a separate law is required for financial institutions, to set out procedures for regulators, and rules for the use of deposit insurance and protection funds for bond and equity investors, said Guo Xinming, head of the Nanjing branch of the PBOC and a delegate to the NPC, in a written reply to questions.

The pandemic has left a significant mark on many Chinese financial institutions, which were already suffering from rising bad debts as the economy slowed in recent years.

Dealing with financial risk already in the system will be a "protracted war," Guo said, adding that the authorities also need to make structural changes to improve the capacity to deal with future systemic risk.

Most of today's troubled institutions are suitable candidates for restructuring, the officials said, as liquidation would be more expensive and lead to job losses.

BAIL OUTS

Following decades with no bank failures, the PBOC has overseen bail outs of several lenders since 2019. Bankruptcy proceedings concluded last month for Baoshang Bank, which has been acquired by big lenders. Two other casualties, Hengfeng Bank and Jinzhou Bank, have been revived by capital injections from strategic investors.

A new law should also set out clearer guidelines for bankruptcy procedings, and for creditors and debtors, said Xu Nuojin, head of the Zhengzhou branch of the PBOC and also a NPC delegate. A better legal framework for resolving insolvent institutions would strengthen financial market discipline and efficiency, he said.

Currently, bankruptcy regulations are scattered between different laws, Xu noted. Together with Guo, Xu was one of the five out of the total 16 central bank delegates sent to this year's NPC and the Chinese People's Political Consultative Conference who called for a new legal framework for financial institution bankruptcy, in line with the government's drive to target financial risks and excessive debt this year.

China's introduction in 2015 of a deposit insurance scheme, which now covers 99% of banks, will also facilitate resolution of weak lenders, Xu said.

MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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