Should China's Latest Bankruptcy Laws Make You Sleep Better?

When it comes to global sourcing and supply risk, there's no greater fear that companies have than a strategic offshore supplier going out of business with little or no warning. Unfortunately, China's recently passed bankruptcy protection law should do little to help global sourcing executives sleep any better at night. While they are a step in the right direction in terms of creditor protection, they also call attention to what up until now has been a near complete lack of regulation and standards -- banking, accounting and legal -- in the region. Before this new law was passed, had bad was it? According to The Globe and Mail"The [new] law ... allows creditors or financial supervision agencies to initiate bankruptcy proceedings against companies whose management are unwilling to do so … Some unprofitable Chinese companies, including state-owned firms, have fallen into such a financial mess that they have been unable to pay bills or workers' wages ... unlike the old bankruptcy law, which was promulgated in 1986 and applied only to state-owned companies, there were no clear guidelines on how the companies could be dissolved and the assets split among employees and creditors. The new law will also allow companies that are doing poorly to apply for reorganization."

To put the state of China's economic and regulatory development in perspective, imagine being a European trading company doing business -- while relying on a tightly integrated supply chain with JIT, VMI and other programs -- with the United States of America in 1800. Aside from limited regulation -- thanks to the work of Alexander Hamilton, among others -- the US banking system and bankruptcy protection laws were only in their infancy. Hopefully that will give you some sense of how far China needs to go from a banking and regulatory perspective. But at least this is a step in the right direction.

Jason Busch

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