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August 29, 2006

Clarifying the risk of insolvency in China

chinese bankruptcy.gifOne of the biggest deterrents to free-market investment in state-controlled economies such as China or Russia is consistent application of the rule of law, and few rules of law are more important to an investment decision than those that bear on the risk of insolvency. So, the news that a long-awaited amendment to China's bankruptcy laws was approved by a powerful government committee and is scheduled to go into effect on June 1, 2007 is an important milestone in the Chinese government's continuing -- but sometimes ineffectual -- attempts to attract greater foreign investment capital in China's economy. A key provision in the new law introduces a mechanism for corporate reorganizations, something that has been alien to the Chinese Communist legal system, but a concept that has preserved massive amounts of employment and going concern value in the U.S. and other Western market-based legal systems.

Investment of foreign capital in China has traditionally been high risk, but the new bankruptcy law reflects that the Chinese government is serious about passing reforms that addresses that risk. Compare that to Russia, where investors still face daunting risk in an economy controlled by a volatile combination of government officials and oligarchs.

By the way, I hope the amendment to the Chinese bankruptcy law corrects this type of problem that arose under the old law. In the meantime, the Chinese government is also attempting to reform the market for funeral attendees in that country.

Posted by Tom at August 29, 2006 5:22 AM |

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