China Business and Finance Update
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For decades, one of the last places the Chinese wanted to find was to stand in front of a judge. However, there are signs of modernization in certain areas of commercial law.
The courts have long been synonymous with the Communist Party’s most terrifying tendencies: political cleansing, suppression of dissent and corruption, and, more recently, hostage diplomacy.
The ruthlessness of the court has shown itself again this year. In January this year, Lai Xiaomin, the former head of one of China’s largest asset management companies, was sentenced to death.A few weeks later Lai was executed.
Commercial cases have adopted different strategies. Chinese courts are increasingly occupying a central position in coordinating the complex restructuring and bankruptcy proceedings of failed corporate groups. This laid the foundation for more interaction with companies and investors, including foreign groups interested in the world’s second largest economy.
According to rating agencies and some investors, the main example of the changes that have just started is the court-led reorganization of the Founder Group of Peking University.
this Well-known corporate group In the 1980s, he began his life under the leadership of a top computer scientist in Beijing’s premier academic institution. After aggressively entering the fields of technology, finance, commodities, healthcare, and real estate, it ran into trouble. At the end of 2019, total domestic and foreign debt was approximately RMB 250 billion (US$38.5 billion), and PUFG has become China’s largest defaulter of US dollar-denominated debt in the past 20 years.
The Beijing court approved a complete reorganization of PUFG last month. A consortium of strategic investors including Ping An, one of the world’s largest insurance groups, will take over the profitable portion of the group under the new entity. The secured creditor will be repaid in full. Unprofitable units will enter a new trust, which may be liquidated.
The rating agency Standard & Poor’s (S&P) reviewed the in-court restructuring of nearly 50 defaulters in China. It praised the speed of PUFG training and the ability to maximize the recovery of the group’s best assets. “[PUFG] Speeding up the restructuring process highlights the Chinese government’s desire for efficient, market-based default solutions. .. The rapidity of transactions and high recovery rates will increase the market’s acceptance of court-led exercises,” said Standard & Poor’s analysts.
According to Standard & Poor’s research, the 581 days from the date of initial default to the court’s approval far exceeded the average of 679 days. The cash recovery rate for unsecured PUFG debtors is at least 31.4%, while the average is 23.7%.
Despite these improvements, offshore investors with weaker bargaining power are still at a disadvantage in court-led procedures. In the PUFG case, the manager did not recognize the so-called “keepwell contract” bonds of approximately US$1.7 billion held by foreign investors.
These contracts are essentially the commitments made by China Overseas Bond Issuers to maintain the solvency of their overseas subsidiaries. According to Bloomberg data, about 110 billion U.S. dollars of China’s outstanding debt have these commitments. Ongoing court proceedings in Hong Kong, such as those with chip manufacturer Tsinghua Unisplendour Group, can provide insights into the enforceability of contracts.
That being said, the transaction price of PUFG’s notes in Hong Kong is about 40 cents per dollar—nearly 30% higher than the recovery of unsecured creditors in China—indicating hope for a partial recovery.
As more Chinese creditors see an improvement in the outcome of state-owned affiliates that have collapsed under a court-led approach, Standard & Poor’s analysts predict that the private sector will follow suit.
The key to the success of the PUFG case is to concentrate the process under the leadership of a manager, including officials from the central bank and banking supervisory agencies. This development is worth noting because inefficient corporate restructuring has long plagued Chinese companies, leaving investors and creditors of troubled companies in a long-term predicament.
It’s a big deal.Since the end of last year, China’s 17.5-ton bond market has been Shocked by more and more breaches. This not only focuses attention on Beijing’s policy makers, Foreign investor They hold approximately US$850 billion in US dollar-denominated Chinese corporate bonds.
Although more centralized procedures will certainly help, given the overcast cloudiness of the Keepwell Agreement, foreign investors will want to ensure that their interests are given equal weight in Chinese courts.