The Chinese government will no longer subsidize state-owned enterprises whose operations are unsustainable, aiming to increase the "efficiency" of the Chinese economy, China's National Development and Reform Commission announced today.
Central government and local administrations are now barred from subsidizing or lending to state-owned enterprises that are not capable of operating without financial support, also known as "zombie companies".
The goal is to "reallocate" resources to sectors where the economy shows more potential for growth, shutting down companies that are unable to remain solvent.
According to the National Development and Reform Commission's directive, the government "must use market tools in resource allocation, standardize competition, reduce market distortions and promote the flow of resources to more efficient entities."
"As for state-owned enterprises that have already gone bankrupt, the parties involved should not prevent their exiting" from the market, the document reads.
The plan also includes the creation of an early warning mechanism for these organizations as well as a legal channel that can be used for the restructuring or bankruptcy of a company.
The plan has already been supported by 13 institutions of the Asian giant, including the Chinese People's Bank (central bank), the Supreme Court, the Ministry of Finance and the National Development and Reform Commission.
The measure was announced one day after data on economic growth in the second quarter of the year was released.
The Chinese economy grew by 6.2% between April and June, the slowest pace of the last three decades, and 0.5 percentage points less than in the same period last year.