BankruptcyinChina.doc

Bankruptcy in China
Silent busts
Oct 9th 2008 | HONG KONG
From The Economist print edition (page 76, Business section)
More Chinese businesses are collapsing—though you would never know it

OFFICIALLY, only a few thousand companies will declare bankruptcy this year in China. Unofficially, local manufacturing groups believe many more than that will go out of business in the southern province of Guangdong alone. And the underlying causes—falling demand for exports, higher material costs, stricter labour laws—are hardly unique to that province. But in contrast to Europe and America, where business failures are meticulously tracked, the only trace left by most of these firms will be rusting locks on their old front gates.
This is because Chinese business owners who wish to shut down their companies have three options: to reach informal agreements with employees, trading partners and the government; to file under the auspices of a court; or to walk away. Each has its drawbacks.
A Shenzhen manufacturer who recently tried to close by informal agreement describes the process as almost impossible. He had to negotiate separately with over a dozen government agencies, including tax, labour and even the fire department; each had demands that changed by the day. Then there were skittish suppliers, one of whom blockaded his firm’s entrance. “Everyone just wanted more money,” he says. “That is why most people just shut down overnight.” The only thing everyone agreed on was the need to avoid the local courts.
Last year a new bankruptcy law came into effect, but it is incomplete and poorly understood. Even firms that might recover by restructuring under court protection are reluctant to use it, says Helena Huang of Kirkland & Ellis, a law firm. In the past, bosses often preferred to run a business down to its last yuan before acknowledging problems, at which point there was little to reorganise. Even under the new law, it is unclear whether lenders who step in after a bankruptcy have priority over old claims, undermining any incentive for a would-be backer to give a firm a second chance.
As a result, any reorganisations that do take place often happen informally. One local municipal government, Ms Huang says, recently bailed out a big local firm because it feared that a collapse would harm local jobs and its own reputation—and this is hardly uncommon. There are quiet bail-outs, she adds, even among publicly listed companies.
More than 30 companies on the national stockmarkets have recently failed, says Alan Tang of Grant Thornton, a consultancy. But in many cases control has been acquired by other firms to engineer a “backdoor listing”, without the lobbying and delays common in China. Evidently some Chinese entrepreneurs continue to believe that a listed firm’s ability to raise public capital is worth having—if not now, then one day.

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skywalker-rick wrote:
October 14, 2008 17:55
Probably 90% of Chinese businesses are small shops that have never registered. The new reforms are putting a lot of burden on the medium to small businesses, which have pretty much been run like described below "they build it, they run it". The trouble is that they don't contribute much taxes, and they don't give any benefits. The new reforms are doing a lot to make them pay - to which a lot of businesses either simply cannot stand the burden, or closes down and then move to somewhere else in China to start as a new business to escape some of the requirements.
The days of mom and pop shop might not be over because the new reforms do not affect them, but the factories and other businesses are trying to cope with the new reforms.
Of course, there are other reasons causing the Chinese businesses to close down, but this one should not be overlooked, since the article talks quite a bit about labor laws and bankruptcy laws. In the 80s and early 90s there were the "suitcase businessman", who pays no taxes and owns no assets other than a suitcase. In the 90s and 00s the labor laws have already forced a lot of burden on taxes and income for the businesses. What one cannot overlook is that the free wheeling and dealing entrepreneurship in China might be severely threaten now.
Franny the Cat wrote:
October 13, 2008 01:23
The last lesson in capitalism is always how to fail.
I don't expect the Chinese to have a working system of bankruptcy for at least 30 years.
But as Canadianchinaman notes, the current system of "run it to the ground, then run" seems to be the most efficient system in the meantime.
Er, unless you're an employee. I guess the real "last lesson" of capitalism is respecting labor rights!
Dave W. wrote:
October 13, 2008 00:14
what is a "company" in the PRC?
here in the West, the word "company" slips out of the mouth so frequently easily, and so we forget to ask: "what, in exact legal terms, is a company?"
given china's lack of a legal system with enforceable laws, comparing a chinese "company" with a usa/euro/japanese company is false and misleading.
Broderben wrote:
October 12, 2008 21:04
To paraphrase another comment of mine, this is why I cannot believe China will become the next superpower. If the official numbers do not even attempt to match reality than you cannot claim to understand the state of your nation. This story reminds me of the pathetic "Great Leap Forward", I simply hope it doesn't have the same ultimate consequences for the Chinese who have to experience it.
SaurabhG wrote:
October 12, 2008 17:01
China has a different style of existence for long, and the reason why their factories are going down is that their revenue model is dependent on one revenue stream (for many industries) - Exports. It's not the case of failure of the factories but a case of Communist ideology failure. Chinese financial regulatory body was required to monitor the dependency of the economy on one parameter and needed to variate that. In future, we can expect more economies to go down as they assumed Chinese economy as robust and ever shining.
The problem with giant economies who create/produce goods in volumes is that they require buyers in volumes too. This case would have been the same if US would have doubled the import taxes (duties). It's the country ideology that determines the fate of it's people.
canadianchinaman wrote:
October 09, 2008 17:20
Many of China's factories were built practically overnight. They can just as easily fall apart overnight. This is of course not good business practice and causes contractual and financial pain to all parties concerned. But on the practical side it spreads the pain around to a bearable and survivable level. The result is the demise of only a minority of the counter-parties. There is no practical recourse from the courts thus it is not worthwhile to incur legal expenses, accounting expenses or the time to find satisfaction. You take your loss and move on. The physical assets will be seized quickly enough, sold and just as quickly redeployed by their new owners in productive work. All old hands in China are aware this is the kind of business environment they work in. It will be the foolish businessman who bets his firm on one particular supplier, on a particular customer or a single market where the demise of one will result in his own demise. It is business risk management in the best Darwinian tradition.