A new chapter?

Why the state media is celebrating Wenzhou’s bankruptcy cases

hu fulin

Hu Fulin: fled, then filed

When Hu Fulin first disappeared in 2011, leaving debts of Rmb2 billion ($300 million) at his eyewear firm, it looked like the so-called ‘King of Spectacles’ would be better remembered as another of Wenzhou’s runaway bosses. But with assurances from the local government that it would help to restructure Zhejiang Xintai’s finances, Hu returned to China just a week later (see WiC126).

Hu boarded his original flight to the US with only $2,000 in his pocket, Xinhua reported this month. But the firm survived the restructuring and it has returned to better health. Hu is now being hailed as a role model for the government’s efforts to clean up ‘zombie’ enterprises, or failed companies.

“Instead of fleeing the country, it is far better to file for bankruptcy protection,” Hu told local TV stations. According to Xinhua, up to 25 other Wenzhou companies have been “reborn” after going through bankruptcy proceedings.

Wenzhou’s experience in this respect has won plaudits from regulators, including the People’s Bank of China. According to the National Business Daily, which sent a reporter to accompany a central bank inspection team on a tour of the city this month, the concept of filing for bankruptcy protection seems to be taking root. Wenzhou accounted for nearly 10% of bankruptcy cases nationwide over the past three years, many of them processed in one of the first courts dedicated to handling such cases.

“According to traditional beliefs, bankruptcy is very inglorious. Businessmen didn’t want to go under, the local government didn’t want them to go under,” the newspaper says. “But today company owners and creditors will take the initiative to file for bankruptcy protection when a business falls into liquidity troubles or zombie status.”

Chinese legislators passed a bankruptcy law in 2007 allowing failed companies to restructure themselves in a similar fashion to Chapter 11 proceedings in the United States (the legislation isn’t applicable to individuals, local governments and financial institutions such as banks). However, private businesses were reluctant to use it because of the stigma of failure, while local governments haven’t pressed their state-owned firms to do so because they don’t want to see the jobless rate rise. More than 500,000 Chinese companies were deregistered in 2014 but only 2,059 (or about 0.4%) went through bankruptcy proceedings. In comparison, almost 40,000 American companies file for Chapter 11 every year, National Business Daily says.

However, Chinese attitudes may be changing: the Supreme People’s Court says there were 1,028 bankruptcy cases in the first quarter alone, a rise of 52.5% versus the same period a year earlier.

Premier Li Keqiang is intent on clearing some of the deadwood from China’s economy, especially in industries afflicted by surplus capacity. That’s why the economic planners and think tanks have been encouraging other Chinese cities to follow Wenzhou’s example. That said, it’s usually only the companies that survive the process that make the headlines. Haihe, a drugmaker, is another of the cases. Like many Wenzhou firms, it ran into trouble when its former bosses started betting on property. Its creditors then took control and sold it to investors, the Economist reports. The lenders didn’t recover much of their original loans but Haihe is operating again, with a viable business.

At a financial conference last month, Wu Xiaoling, a former central banker, said the central government should step up its efforts to enforce China’s version of Chapter 11, as most zombie enterprises have little chance of recovery, but chew up scarce resources. The advice was echoed by a legal expert, who this week told the Financial Times that bankrutpcy protection shouldn’t just be used as a means to keep dud firms ticking over. “I personally think liquidations should be used more,” commented Li Shuguang, professor at the China-EU School of Law at China University of Political Science and Law. “Only enterprises with real value should be saved. The most important thing for zombie firms is to liquidate them. Then we can find better ways to deal with laid-off workers, like retraining and re-employment,” he told the FT.

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