Years ago, when someone got a job at a State-owned enterprise (SOE), friends would offer congratulations on obtaining "an iron rice bowl," the Chinese idiom to describe someone with a lifetime job.
But things have changed a lot in recent years, especially when many SOEs encountered difficulties in their operations, and those so-called stable jobs can seemingly disappear at any moment.
Some SOEs are longstanding pillars of their local economies, as they generate fiscal revenues, help maintain growth momentum and create jobs. In return, local governments favor those companies.
For example, they can borrow heavily from local banks while enjoying lower taxes, or they can raise funds through one bond issue after another despite high debt ratios, because their local governments will back them no matter what.
Local SOEs and local governments have had an unbreakable bond for years. And this special relationship also made local SOEs' bankruptcy unlikely, as their failures would also affect the credibility of local governments. Regulators would not let that happen.
That is, until now.
The looming bankruptcy of some local SOEs may change this "too big to fail" mentality and force such SOEs to become more market-driven.
State-owned Guangxi Non-Ferrous Metals Group went into liquidation on Monday after failing to carry out a debt restructuring.
The company has been losing money since 2012 because of overcapacity in the non-ferrous metal industry and misdirected corporate strategies.
Its debt reached 8.22 billion yuan ($1.23 billion) as of the end of November 2015, and the debt-to-asset ratio was about 120 percent. From August to September, the local government in South China's Guangxi Zhuang Autonomous Region made 10 moves to help the company by giving short-term loans, cutting its taxes and establishing a special fund.
But in the end, the government was not able to save this SOE, because the government's own credibility was deteriorating along with the company's financial position.
Another local SOE entangled in nearly $30 billion in debt from 105 creditors is Bohai Steel Group, located in North China's Tianjin. Although the local government has reportedly come up with a debt-to-equity program for the company, it seems that many creditors aren't satisfied with the proposal. If there's no solution, the local government will have no choice but to let the steelmaker fail.
Also, the local government in Northeast China's Liaoning Province may act in the same way as its counterpart in Guangxi, as Dongbei Special Steel Group Co's repeated debt defaults have left local lenders with a big problem.
If a company can't repay the principal and interest on its loans, entering the bankruptcy process is not a bad choice, as it can at least sell some of its quality assets and perhaps save some of its core businesses.
For example, Dongbei Special Steel has strength in making defense-related steel products, so why not look for a buyer for this part of the business instead of struggling endlessly amid rising debt.
In China, bankruptcy is sometimes construed as a failure by a particular company or local government, but it is normal in a market-driven economy that some players fail and others prosper.
In 2014, less than one out of every 1,000 Chinese companies entered bankruptcy proceedings. In Europe, the figure was 70.
Still, there are some local governments that just won't let go of failing SOEs. Despite debt of 50 billion yuan, Heilongjiang Longmei Ming Holding Group Co, is still being backed by the local government, which recently asked local financial institutions to give more financial support to the coal maker.
