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Anjani Trivedi

Bankruptcy Is Exactly What China Needs

It’s not quite Chapter 11, but a more robust legal framework has bloated state-owned enterprises in its crosshairs.

Sometimes bankruptcy is the only way out of a crisis.

Sometimes bankruptcy is the only way out of a crisis.

Photographer: Zhang Peng/LightRocket/Getty

As debt defaults for state-owned enterprises in China rise, international investors find themselves in what for most is a new place: Chinese bankruptcy courts. That may be just the right venue for them, debtors and regulators to meet and take a crucial step toward a better functioning economy.

Investors have been spending years to recover their money out of court, but China’s bankruptcy law has now gained enough critical mass to test in modern markets. First trialed in 1986, it’s been expanded and updated in the years since then, including a new section in 2007 that deals with reorganization of companies, modeled on the famous U.S. Chapter 11. By the end of 2017, almost 100 courts dealing with bankruptcy and liquidation issues had been set up.

That turns out to have been well-timed for the gradual slowdown that morphed into crisis this year as Covid-19 took a grip on the economy, crushing some businesses along the way. Gezhi Automobile Technology Co., a creditor of Brilliance Auto Group Holding Co., filed an application last month to start a court-led restructuring after the joint-venture partner of BMW AG defaulted on almost $1 billion of debt. The tribunal has approved the petition.