How China’s Adoption of American-Style Bankruptcy is Changing the Way the Nation Does Business

For a large part of China’s history, buying and bailing out failing businesses has been the government standard. After all, keeping creditors happy and employees working has always been a priority for the economy. However, that economy is changing – more specifically, it is slowing. To cushion that fall, the nation was left with no choice but to rethink its obligation to its businesses.

In recent years, China has taken a new approach – one that many people are likening to the American way of approaching debt and a slowing economy. That approach is to embrace bankruptcy – to allow businesses to fail.

Why Bankruptcy is Catching On in Beijing

China is facing a mounting debt problem. Billions in corporate debt that would have once been the responsibility of the state or other government creditors to cover is now being handed over to specialized bankruptcy courts.

Perhaps the nation is concerned with the growing number of failing companies – and rightfully so. Smaller local governments are not capable of keeping up with the need for bailouts that these failures present. That lack of resources can create a need for siphoning funds from other important government efforts – something that can impact all citizens negatively.

The creation of more than 90 new bankruptcy courts seems to be working. Experts inside and outside of the country have noted that the potential for debt relief is inspiring many business owners to continue their efforts to get back on track rather than throwing in the towel, which has been an all-too-common approach in years past.

Mirroring American Approaches

China’s bankruptcy courts and processes are patterned after the American Chapter 11. This means that the goal is to restructure a company’s finances and attempt to repay creditors over time. This allows businesses to remain open and employees and owners to continue making a living, all while paying down debts that might otherwise never be repaid.

Social Concerns

While it may sound like a great plan, many citizens have experienced negative effects of the Chinese adoption of bankruptcy. The approach can cause serious social unrest, since Chinese bankruptcy tends to favor debtors and creditors, rather than shareholders.

Specific examples in many news stories include men and women who have bought into condominium structures, only to lose their money when the building owner defaults on the loans they took out to construct the condos. Other examples include those who have purchased property to start a business but have been unable to do so, such as aspiring restaurateurs.

The problem is that China’s approach to bankruptcy doesn’t cater to these people. Instead, the process tends to favor the businesses and their creditors, leaving many people who have supported those businesses in the past out of luck – and out of the money they previously contributed.

Social issues that are deeply rooted in Chinese culture have made the integration of bankruptcy into the government’s approach to debt relief tricky. Many Chinese people view failure as shameful, something that is woven into the fabric of every layer of their culture. This includes financial dealings, both personal and professional. Adopting an approach that relieves debt gradually and gives those who are struggling with it a helping hand out of trouble has ruffled many feathers – and that is only the beginning.

Those involved in the process of bringing bankruptcy to China have faced everything from public criticism to death threats for their contribution. Personal bankruptcy still does not exist in China, so the failure of companies can be seen as only reinforcing the problem of failing businesses – and personal failure on the part of leadership. The fact that this perceived failure impacts employees from top to bottom only compounds the problem and complicates the integration of bankruptcy into Chinese society.

Changes Long Overdue

Many of the concerns just mentioned began with China’s formal adoption of bankruptcy law in 2007. In 2015, those laws began to change. Social pressure led to a sharp examination of the bumps in the road to financial stability that these laws were creating for the nation’s citizens. When numerous law enforcement officers had to be employed to protect the people convening to sort out large debts owed by big businesses who were failing, the government took notice – and began to take action.

The same culture that has complicated the adoption of bankruptcy in China is helping many courts to speed up and streamline the process. The key is knowing how to use China’s technological savvy to make recovering debts easier. Many judges are ordering companies to auction their assets – from buildings to equipment to decor and more – on websites that allow these items to be sold to private citizens or other companies. This allows for a quick recovery of at least some portion of the total debts owed by these companies.

Courts have also integrated everything from social media to advertise these auctions to productivity targets to keep cases coming in and going out. A judge may receive thirty times as much credit via government recognition for a single bankruptcy case as they would for a civilian case.

All of this has come together to mirror the American approach in many ways. Unlike the previous technique that burdened the government with deciding which business ultimately succeeded or failed, this task is now largely left to the forces of the market. In this way, consumers are more directly involved in the success of their favorite companies – and business owners now have better options for getting help if they find themselves dealing with more debt than they can handle.

As Chinese business owners are learning, bankruptcy can be a fresh start that many companies can benefit from. If your business is drowning in debt, there is no shame in seeking guidance. Speak to the legal experts at the Van Horn Law Group today. We can help you determine whether bankruptcy – or another approach – is best for your business and how to proceed with your financial future in mind.