Bankruptcy law's failings cut both ways
Offshore investors are poorly protected on the mainland and debt issuers across the border pay the price with higher funding costs
The provisional liquidation of China Metal Recycling (CMR) initiated by the Securities and Futures Commission opens up an intriguing possibility: could this end up in mainland bankruptcy court?
If so, it would be an important test case for offshore creditors in terms of their ability to recover money from a defaulted mainland issuer. That would give offshore investors a lot more confidence to lend to mainland firms, and that would lower these firms' costs of cross-border funding.
There are a handful of reasons to expect that CMR may go to mainland bankruptcy court: the SFC triggered the provisional liquidation in Hong Kong courts and may have the clout to expand the action to the mainland court system; the firm's main creditors are large banks, foreign and domestic, that could also put some pressure on the local government to let this go to court; the mainland's bankruptcy law was revamped in 2007 explicitly to recognise foreign bankruptcy proceedings and claims on onshore assets, and the law is overdue for a test. But that's all hypothetical. Foreign investors currently feel poorly protected by mainland bankruptcy court, and issuers pay the price.
Thomson Reuters data shows that mainland issuers pay substantially more than US firms for unsecured bonds of equal ratings and tenor (see table).
"A double-B rated Chinese real estate bond trades a lot higher than an equivalent double-B real estate credit from the United States. The US bond would yield 5 to 6 per cent compared with a 10 to 12 per cent yield for the Chinese bond," said John Wade, head of debt capital markets, Asia-Pacific, at RBS.