Efforts to whittle away at China's mountain of non-performing loans will get some help when the National People's Congress passes a proper bankruptcy law, something a senior legislator says will happen no later than June.
Experts in the accounting profession believe foreign investors will be more confident in acquiring such distressed assets when the draft bankruptcy law is passed and introduced after a decade in the making, although as foreign debt resolution specialists will attest, this will also depend on Beijing's commitment to clean up a mountain of bad loans.
``Now, with this bankruptcy law, foreign investors will have more confidence and it will speed up the non-performing loans disposal process,'' CPA Australia vice president Derek Lai said. ``At least they know they'll have a last resort.''
Zhu Shaoping, the director of Financial & Economic Committee of National People's Congress, said the bankruptcy law will be passed before June and become effective early next year, according to Lai.
China has never had a proper bankruptcy law covering all types of enterprises, only a mix of rules and laws that vary to different degrees in their application. It introduced the first version of a bankruptcy law, as a trial implementation, in 1986 to deal with bankruptcy cases of state-owned enterprises and it has been in use until now.
For private enterprises, a Civil Procedure Law has been used since 1991, which has only about 10 sections that relate to bankruptcy matters.
``It is basically no law,'' Lai said, adding that it is not only incomplete, but full of loopholes.
China's huge increases in bad debts, accompanied by an accelerating momentum for reform following the country's entry into the World Trade Organization three years ago, has galvanized the government into implementing a bankruptcy system that can meet global standards.
``The new law, when implemented, should give purchasers of non-performing loans a clear avenue for realizing these loans,'' said Joanne Oswin, a partner with PricewaterhouseCoopers in Hong Kong, who specializes in corporate finance and recovery. After the ninth version of the draft law, Enterprise Bankruptcy Law, was submitted to the National People's Congress Standing Committee for its second hearing last October, there was increasing speculation that the law would eventually be passed.
An important law in China is usually passed after three to four hearings.
The bankruptcy law will, it is hoped, allow banks to seize a failed company's assets, giving local financial institutions greater security when making loans to mainland corporations, whether private or government-owned.
This should give banks a timely boost. Their non-performing loans (NPL), while officially appearing to fall, still total around US$190 billion (HK$1.48 trillion), according to official state figures. Private estimates run as high as US$600 billion.
In 1999,
Beijing set up four asset management corporations (AMCs), charged with cleaning up soured debt at the ``Big Four'' lenders. The four AMCs - Cinda, Orient, Huarong, and Great Wall - were given 10 years to clear up all NPLs and be dissolved, but most have dragged their feet.
Foreign investment banks, such as Morgan Stanley and Citigroup, and bad loan clean-up specialists such as US-based Lonestar, are keen to break into China's potentially enormous NPL industry. Foreign corporations have reaped huge profits buying and selling bad assets from stricken banks in Japan, Korea, Germany and US, and leading debt clearance houses hope China will be the next market to take off.
But problems persist, not least a fear among senior Chinese officials of allowing state assets pass into the hands of foreign companies.
This, above all else, has kept China's fledgling NPL market stuck in first gear. While AMCs pay lip service to foreign firms, most - the relatively forward-thinking Huarong AMC notwithstanding - prefer to exchange dud loans with local government institutions and state firms, mostly in exchange for shares. The new bankruptcy law is expected to be creditor friendly, but in some ways, the ninth draft also highlights some concerns.
In the eighth draft, the administrators, or liquidators, are appointed by the creditors and approved by the court, similar to international standards seen in many jurisdictions.
The ninth draft states that it is the court that makes the decision. This represents a ``step backward'' as it will raise corruption concerns, Lai said. The influence of creditors is also reduced.
``The reason for that is those [international] jurisdictions take the view the administrators primarily work for the interest of the creditors,'' Oswin said. ``So it's unusual China has taken the view that the court should select the administrators.''
In the ninth draft, another deviation from international standard is the priority of payments when a firm goes bust.
``Wages and salaries of workers rank higher than other unsecured creditors, and even secured creditors,'' Lai said.
Oswin also noted the deviation as unusual. Even though it is a concern, she believes it is ``a fact of the system that employees must be protected in China. The administration doesn't just see the creditors as the stakeholders in a bankruptcy,'' she said.
``Employees' interests are much more sensitive [in China] and I suppose for that reason, the Chinese government would like to make sure that the administrator doesn't take a mercenary approach to a liquidation.''
Nevertheless, the eventuality of a proper bankruptcy law still represents a breakthrough.
``Once this law is passed, the burden for implementing it falls onto the courts and administrators,'' Oswin said.
``In theory, the law should give a clear path for how NPLs will be recovered. In practice, whether that's going to come true really depends on how successfully and quickly the new law is implemented.''
