The mainland may register only a few bankruptcy cases every year but the numbers hardly tell the true story of the innumerable overseas investors who got burned in ventures there, a liquidation specialist says.
'The problem on the mainland is that only a few companies undergo formal bankruptcy procedures. In most cases, the owners simply disappear overnight,' said Alan Tang Chung-wah, a partner and head of specialist advisory services at accounting firm ShineWing (HK) CPA.
'Some factories may open normally one day but suddenly shutter the next morning, leaving in the lurch creditors and overseas shareholders who will then have to go through a lengthy and painful process to recoup their assets,' Tang said.
According to Beijing Siyuan Consultants, there were 1,973 bankruptcy cases on the mainland last year, down from 2,434 in 2009 and 2,955 in 2008. The number has been declining from a peak of 8,939 reached in 2001. Last year's number was similar to the level in 1994.
But as Tang put it, the apparent improvement was mostly because of an absence of a sound system of implementing bankruptcy laws or procedures to orderly wind down a company on the mainland.
Unlike in Britain, which has bankruptcy laws since 1542, and the United States, since 1800, China put in place its first bankruptcy law only in 1906. After the Communist Party took power in 1949, the law was scrapped. In 1986, a new bankruptcy law was introduced on a trial basis. It was updated in 2006, which, however, does not have comprehensive rules on how to implement the law.