Bankruptcy comes to China . . . and that’s good
KAI RYSSDAL: Wall Street’s clipping right along but the Shanghai Composite Index has had a rough week. The benchmark index ended trading today down more than 5 percent from where it started on Monday.
For now shareholders are mostly sitting tight. But when they do decide to sell, as they inevitably will, businesses on the losing end of those trades could wind up going under. So investors and executives are paying special attention to a new corporate bankruptcy law that took effect today.
Our Shanghai correpondent Scott Tong reports on China’s latest stop on the road to a free-market economy.
SCOTT TONG: This is the sound of a Chinese company going under. . . .
It’s a corporate bankruptcy auction in Shanghai. Here, a company’s 4-year-old minivan is getting liquidated for $10,000.
In China, the money from these auctions tends to go to the bankrupt company employees to pay their wages and pension benefits. Anything left over goes to the banks that gave loans to the company — the creditors. Corporate lawyer Susan Munro says putting workers first in line is a holdover from old-school China — when the state provided cradle-to-grave protection to workers. They called it the Iron Rice Bowl.
SUSAN MUNRO: The focus of the government was on employees, on making sure that people had the wherewithal to earn a livelihood and have their basic needs met.
Today’s new law is part of modern, free-market China. Meaning, creditors get to go the front of the bankruptcy line just like in the U.S. and much of the world. Attorney Dan Roules considers this a big deal for banks in China. He says before, they didn’t get much of their money back when loans went sour. So in some cases they didn’t lend in the first place — especially to the new, smaller business. But now they have more faith they’ll be repaid.
DAN ROULES: Typically, the creditors just have not been willing to take the risk. That’s why the law should be helpful in facilitating further lending than was available before.
He says the bankruptcy law provides a smooth, orderly process for struggling firms to go under and pay off their debts so everyone can move on. And the moving on is the key here. He says someday China will hit a recession, and it needs an efficient way to ditch the weaker companies and get going again.
ROULES: Now is the opportunity to put some of these mechanisms in place, so that whenever that time comes they will be there and allow for a less painful process of thinning the ranks of inefficient operations.
The new law sets tough deadlines for companies to liquidate, a process that used to take years can now get squeezed into just two months.
The poster child of what not to do is Japan in the 1990s. Banks there kept ailing companies on life support, says Shanghai lawyer Zhou Yongsheng.
ZHOU YONGSHENG: Japanese banks were very slow to clear out bad debt and nonperforming loans. So they suffered when the economic bubble popped and took a long time to recover.
So will China’s new law trigger a sudden wave of bankruptcies? No one really thinks so. It’s one thing for Beijing to pass a law, it’s quite another for the centeral government to exert its will and compel companies and judges in the hinterlands to implement it.
In time, though, most think the new bankruptcy law will take root. And when it does, make for a more competitive, survival-of-the-fittest Chinese economy. One where the inefficient business, like the dodo bird, just won’t fly.
In Shanghai, I’m Scott Tong for Marketplace.
KAI RYSSDAL: Wall Street’s clipping right along but the Shanghai Composite Index has had a rough week. The benchmark index ended trading today down more than 5 percent from where it started on Monday.
For now shareholders are mostly sitting tight. But when they do decide to sell, as they inevitably will, businesses on the losing end of those trades could wind up going under. So investors and executives are paying special attention to a new corporate bankruptcy law that took effect today.
Our Shanghai correpondent Scott Tong reports on China’s latest stop on the road to a free-market economy.
SCOTT TONG: This is the sound of a Chinese company going under. . . .
It’s a corporate bankruptcy auction in Shanghai. Here, a company’s 4-year-old minivan is getting liquidated for $10,000.
In China, the money from these auctions tends to go to the bankrupt company employees to pay their wages and pension benefits. Anything left over goes to the banks that gave loans to the company — the creditors. Corporate lawyer Susan Munro says putting workers first in line is a holdover from old-school China — when the state provided cradle-to-grave protection to workers. They called it the Iron Rice Bowl.
SUSAN MUNRO: The focus of the government was on employees, on making sure that people had the wherewithal to earn a livelihood and have their basic needs met.
Today’s new law is part of modern, free-market China. Meaning, creditors get to go the front of the bankruptcy line just like in the U.S. and much of the world. Attorney Dan Roules considers this a big deal for banks in China. He says before, they didn’t get much of their money back when loans went sour. So in some cases they didn’t lend in the first place — especially to the new, smaller business. But now they have more faith they’ll be repaid.
DAN ROULES: Typically, the creditors just have not been willing to take the risk. That’s why the law should be helpful in facilitating further lending than was available before.
He says the bankruptcy law provides a smooth, orderly process for struggling firms to go under and pay off their debts so everyone can move on. And the moving on is the key here. He says someday China will hit a recession, and it needs an efficient way to ditch the weaker companies and get going again.
ROULES: Now is the opportunity to put some of these mechanisms in place, so that whenever that time comes they will be there and allow for a less painful process of thinning the ranks of inefficient operations.
The new law sets tough deadlines for companies to liquidate, a process that used to take years can now get squeezed into just two months.
The poster child of what not to do is Japan in the 1990s. Banks there kept ailing companies on life support, says Shanghai lawyer Zhou Yongsheng.
ZHOU YONGSHENG: Japanese banks were very slow to clear out bad debt and nonperforming loans. So they suffered when the economic bubble popped and took a long time to recover.
So will China’s new law trigger a sudden wave of bankruptcies? No one really thinks so. It’s one thing for Beijing to pass a law, it’s quite another for the centeral government to exert its will and compel companies and judges in the hinterlands to implement it.
In time, though, most think the new bankruptcy law will take root. And when it does, make for a more competitive, survival-of-the-fittest Chinese economy. One where the inefficient business, like the dodo bird, just won’t fly.
In Shanghai, I’m Scott Tong for Marketplace.
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