Foreign Creditors Face Bankruptcy Riddle in China

As China’s economy slows and Beijing becomes more relaxed about letting its companies fail, a rising number of foreign bondholders risk being caught up in the country’s unpredictable court system.  Last month, solar producer Baoding Tianwei Baobian Electric (600550.SS) became China’s first ever state-owned company to default on a bond coupon payment, showing Beijing’s increasing willingness to let companies go bust in a bid to reform its corporate market.

Also in April, Kaisa Group became the first Chinese property developer to fail to pay a coupon on its U.S. dollar bonds and Internet company Cloud Live Tech Group 002306.SZ failed to repay nearly $40 million to bondholders.  Although onshore and offshore bondholders have equal standing in China’s bankruptcy law, lawyers and investors who have experienced corporate failures in China, say bankruptcy proceedings are subject to interference from local government officials who rarely prioritize offshore bondholders.

“The courts can and do exercise wide discretion, and it’s not always clear how that discretion is applied,” said Mark Hyde, global head of the insolvency and restructuring practice at law firm Clifford Chance in Hong Kong, who advised creditors in the 2014 bankruptcy of solar producer Chaori, China’s first domestic bond default.  “This is in contrast to other jurisdictions like the U.S., where the key question is whether the legal issues have been satisfied.”