Bankruptcy regulation set to boost social credit system

China's first regulation on individual bankruptcy, adopted in August in Shenzhen, Guangdong province, will play a big role in stimulating the country's market vitality, maintaining its social stability and helping it improve its credit system, a high-placed bankruptcy court official in the city said.

The regulation takes effect on March 1. It is seen as a key step by Shenzhen, the nation's first special economic zone, in setting up a system for entities to withdraw from the market by rule of law, according to Cao Qixuan, chief judge of the Shenzhen Bankruptcy Court at the Shenzhen Intermediate People's Court.

Cao regarded the system as a second chance for "honest but unlucky "businesspeople, saying it will help them "take a breath" from heavy debts they can't pay off and sharpen their competitive edge to drive the country's economy through innovation.

But the regulation will not help them avoid paying debts, he added.

The city had about 3.3 million businesses registered by the end of January 2020, of which 1.24 million were individuals, Shenzhen Special Zone Daily reported. Additionally, freelancers and people involved in e-commerce services are also a major part of the metropolis' workforce.

"If debtors neither return money for a long time nor withdraw from the market, the economic cycle will become unbalanced and their conflicts with creditors will be easily aggravated," Cao said. "They are potentially social risks, and their situations could lead to violent debt collection incidents."

To solve the problem, the Shenzhen court spent years researching effective ways for individuals to withdraw from the market. This was done "because the city, which has diversified and prosperous commercial activities, needs such a system and should take more responsibility for making new rules", Cao said.

After submitting a draft regulation to the city's legislature and then soliciting public opinion, the standing committee of Shenzhen's people's congress passed the Shenzhen Special Economic Zone Individual Bankruptcy regulation at the end of August.

With 173 articles in 13 chapters, the regulation looks to expeditiously improve the socialist market economy system in response to a decision made by the Fourth Plenary Session of the 19th Central Committee of the Communist Party of China in 2019.It also is meant to pave the way for the country to promote individual bankruptcy legislation.

According to the regulation, residents who have been living in Shenzhen and who have paid social insurance for three consecutive years will be allowed to apply for individual bankruptcy liquidation, reorganization or conciliation if they are unable to pay off their debts because of business struggles or problematic consumption.

Applicants will face various restrictions in life or work, including being barred from buying high-class air or train tickets or making real estate purchases, and if they do not break the rules for three years, they will be freed from debts in line with the regulation.

"The inconvenience is meant to help applicants understand how important credit is in business," Cao said.

He said that information about applicants and their assets will be public record, and the applicants will be held liable and their applications will be canceled if they are found to be cheating or using tricks to avoid paying their debts.

Wang Shujun, a researcher at Southwest University of Political Science and Law, said after the regulation was announced that individual bankruptcy is essential for a market economy and will strongly support the country's efforts to create a sound business environment.

But she added it is crucial to strictly distinguish "honest but unlucky "market players from those who avoid paying debts by faking bankruptcy.