Judging from what I observed at a conference attended by many from the distressed asset industry in Asia recently, information on what the Supreme People’s Court (SPC) is doing to ramp up bankruptcy law has not made it to distressed asset/restructuring professionals outside of China, some of whom seem to think that policy emerges fully formed from Beijing.
This blogpost shows that bankruptcy policy is in fact an evolving process, provides some new data on 2015 and 2016 cases, and summarizes the latest policy signals coming from the Supreme People’s Court in recent months.
As the first chart shows, the number of companies established in China is steadily rising Since the Chinese Company Law was amended at the end of 2013, it has been much easier to establish a company. According to the SPC, since those reforms, an average over 10,000 new companies are established daily, but less than 70% remain in business after 5 years, and less than 50% remain in business after 9 years. Most companies simply deregister, or live on as zombies, as the following charts show:
companies established yearly, in units of 10,000
cancellation of company registration
As reported earlier (and the chart below shoes), the number of bankruptcy cases has gone steadily down until 2015:
Full year statistics for 2015 were recently released by the Supreme People’s Court–3568 new bankruptcy cases were accepted. It is linked to the SPC ramping up bankruptcy law. Some local breakdowns:
Shenzhen: 131, accounting for 40% of cases in Guangdong.
Numbers for 2016:
- January, 2016: 167. This article lists the names of the cases;
- February, 2016: 101, breakdown found here.
- March, 2016: 127, breakdown found here
- April, 2016: 153 (breakdown found here)
Following the 5th Plenum the end of 2015, the SPC has taken steps to promote the role of the courts in eliminating zombie enterprises. This was first announced at a national court conference in December, 2015 (reported here). This is bankruptcy (insolvency) in the Chinese political and legal environment, which means extensive government involvement.
Certain local courts are taking the lead as pilot bankruptcy courts:
- Shandong; and
Executive Vice President Du Wanhua of the SPC is the spokesman for bankruptcy policy, and in his many press statements is making the same points:
- The courts should promote more bankruptcy reorganization and conciliation, and diminish liquidation cases (a contrast to what has occurred in recent years). (The SPC has promoted this approach through recent reports promoting reorganizations by the courts and is continuing to promote this in its pronouncements. Local governments are adopting policies to promote reorganization of companies.)
- A market-oriented mechanism should be established which classifies zombie enterprises. The mechanism should distinguish ones than can be saved through restructuring or conciliation procedures from the ones that should be liquidated. The classification should fulfil the industrial development goals, targets, and other principles of the central government. (But, Professor Liu Zhibiao, a leading economist suggested in a recent interview that it should the market to determine this, not government.)
- A unified coordination mechanism for bankrupt enterprises needs to be created under the local Party committee’s strong leadership and support of the relevant government departments to ensure cases are handled in an orderly manner. To avoid this “strong leadership” being implemented to protect local companies ( a study published in the fall of 2015, Ma Jian of the SPC’s research office showed that local government interference in the acceptance, and trial of bankruptcy cases is common), Judge Du proposes that jurisdiction in bankruptcy cases be consolidated in certain courts
- The rights and interests of the state, workers, creditors, and investors should be protected (in this order).
- A corporate restructuring bankruptcy information platform mechanism that uses modern information technology tools should be created to promote the greatest degree of success of corporate restructuring, and better use of economic resources.
- Orderly mechanisms should be established to deal with wages, state tax, and the priority and realization of secured claims, unsecured claims.
- Local courts should establish bankruptcy divisions and provide bankruptcy judges with better bankruptcy law training;
- Procedures for bankruptcy administrators should be drafted and their status should be improved;
- Special funds should be established to pay for bankruptcies and bankruptcy administrators;
- Local governments, such as Guangdong, are starting to issue policy programs on “supply-side reforms.” The Guangdong program, issued on 28 February, contains a section on bankruptcy. The Guangdong policies mention separate databases for bankrupt state-owned and non state owned enterprises, mentioning that special policies would be forthcoming for state owned enterprises (SOEs) and that courts would be given the “green light” to deal with the bankruptcy of zombie companies. Reflecting policies seen elsewhere, the Guangdong government is seeking to encourage private enterprises to assist in re-organizing SOE zombies and is considering establishing special funds to assist companies to upgrade.
- One of the industries that is a focus of bankruptcy is real estate. While Shenzhen, Shanghai, and some other real estate markets are doing well, that is not the case in other locations, as discussed in this earlier blogpost.
Some of the outstanding legal policy issues:
- Putting in place a better transition from enforcement to bankruptcy procedures (Zhejiang rules recently issued linked here);
- Consolidating jurisdiction of bankruptcy cases;
- Consolidating the bankruptcy of related companies;
- Familiarizing the market with bankruptcy law;
- Improving the regulatory structure for bankruptcy administrators (Zhejiang leading the way, see these May, 2016 regulations).
Other bankruptcy related political/economic issues:
- Dealing with the large state-owned money losing companies (this article lists 16, but says that they are not likely to be left to market forces); and
- Stealth unemployment of SOEs.
One of the points made at the conference is that China does not need ideas from abroad. If that were true, there would not be so many Chinese articles on bankruptcy law reform, including by Judge Du, discussing the UNCITRAL Model Law Cross-Border Insolvency and bankruptcy law in other jurisdictions, including the United States.
Another major issue and difficult issue is cross-border insolvencies, both in situations where the offshore parent goes into bankruptcy and when a Chinese company with offshore subsidiaries goes into bankruptcy. The first situation now happens regularly, creating difficulties and uncertainties for the insolvency/bankruptcy administrator of the offshore parent as well as for creditors. The second we will see some some time in the future, when some of the over-leveraged companies that have invested abroad go into bankruptcy.