China's New Bankruptcy Laws: Not Quite So Good For Business
Last month, I posted on China's new bankruptcy laws, scheduled for a June, 2007, enactment. That post was entitled, "China's New Bankruptcy Laws: Good For Business," because it looked like China would soon have a comprehensive bankruptcy code that would facilitate lending and collection. The new law will put creditors before employees and my post talked about how the law was being delayed until June, 2007, so China's state owned enterprises (SOEs) could file for bankruptcy before June, 2007, to avoid coming within the new provisions.
Now it has become clear that China's 2000+ SOEs will not come within the purview of the new laws until at least the end of 2008. This means that until such time as the SOEs are covered by the new bankruptcy laws, their employee wages and health benefits will have priority over any creditor claims.
This is bad news and it indicates China's reformers have lost out on these laws. This failure to include SOEs in the new law likely will slow down the purchasing of SOE companies through bankruptcy restructuring buyouts and will also hurt the Chinese banks, which have made big loans to SOEs. It appears the fear of employee dislocation has trumped business sense and China's new bankruptcy laws, though certainly a step in the right direction, are not so good for business after all.
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By Brad Luo and Steve Dickinson On June 1, 2007, China enacted a new bankruptcy law. One year on, our report from the field indicates it is only very slowly having an influence on debtor-creditor relations. Like so many of China's newly enacted busines... [Read More]
Comments
Given the fear of bad loans on the books of Chinese banks, how could this happen? I assumed that the banks would have the resources and prestige to have the law help them out. Is the Chinese government prepared and capable to bail out their banking sector down the line?
Posted by: Damien Del Porto | September 25, 2006 1:44 PM
The SOE bad loans are now largely off the books of the banks and in the hands of the asset management companies. What happened was that the SOE's exchanged the bad debt for bonds that were backed by the AMC's. The AMC's then exchanged the debt for equity in the companies. It's not going to hurt the banks at all since they are out of the picture.
This is likely to have very minor impact since bankrupt SOE's are largely worthless as enterprises, and does prevent asset stripping since the SOE's are sitting on some valuable real estate.
What it will mean is that the Chinese government will end up with a slightly larger bill when the SOE's are wound up.
Posted by: Joseph Wang | September 25, 2006 8:05 PM
Mr. Del Porto (TechBizChina) --
Thanks for checking in. I am certainly not ready to predict that the delay in enforcing the new bankruptcy laws against SOEs will cause China's banks to crash, particularly since I do not know how many SOE loans these banks still have on the books. I also do see the government as being willing to step in to prop up the banks should there be a problem. What choice does the government really have, anyway?
Posted by: China Law Blog | September 26, 2006 7:55 AM
Mr. Wang (TwoFish Blog) --
Thanks for checking in.
I realize that the bulk of the banks' bad loans were taken off the books a while ago, but I also assume that the banks are still writing loans to SOEs and that some of those loans are bad or will be going bad. I do not know the extent of the problem and I tend to agree with you that it is not going to be a major one. At the same time, I am sure that the banks would have been better off without this exception lasting until 2008.
Posted by: China Law Blog | September 26, 2006 7:58 AM