A growing number of observers see a substantial risk of an economic downturn in China within the next few years. Let us assume, for the sake of argument, that they may be right.
If their fears prove well-founded, there will be social and political implications, the significance of which will be linked to the depth and duration of any downturn.
With that in mind, it is perhaps significant that, after debates stretching back to the 1980s, two significant pieces of legislation are at last in sight which, if properly implemented, may help cushion any economic blow by promoting an orderly restructuring of important parts of the economy which have to date proved difficult to reform.
One item is China’s first comprehensive corporate insolvency legislation, or bankruptcy law. This was enacted on August 27, though it will not come into force until June next year.
The fundamental content – payment priorities, court supervision, imposition of duties on liquidators, scope for unwinding transactions at undervalue and so forth – is essentially in line with European and North American norms.
Possibly the most significant aspect of the new law lies in its rules and process for corporate rehabilitation (and the related write-off of debts), which is more or less a Chinese equivalent to Chapter 11 in the USA or administration in the UK.
Importantly, the criteria for judicial approval of rehabilitation plans focus on the rights of creditors and, to a lesser extent, shareholders, and require the court to be satisfied that the debtor’s business plan is "feasible" if liquidation is to be avoided.
Other issues, such as the effect on employment, don’t get a look in, although it’s difficult to predict how things will operate in practice. Clearly the wisdom with which these provisions are applied may have a great impact in the event of a downturn.
The second matter of significance is that the State Council has approved draft competition – or, as Americans call it, antitrust – legislation for consideration by the National People’s Congress. This is still going through the legislative process but the main issue surrounding its enactment appears now to be "when" rather than, as previously, "if" and "what."
The content is very similar to the EU’s long-standing laws against anti-competitive agreements and the abuse of dominant market positions.
The draft legislation even includes provisions which may create important legal tools for tackling local governmental protectionism. Perhaps ominously, these have been rendered much vaguer (after lobbying) compared with earlier drafts: fairly clear prohibitions of a variety of commonly encountered mechanisms of local protectionism have been deleted and replaced with broader statements of principle.
There is nothing wrong with that in theory – corresponding laws in many countries have taken a similar approach. But it requires that a significant amount of faith be placed in the judiciary to decide what the fine-sounding phrases actually mean in concrete situations.
Let us assume that these two pieces of legislation are administered energetically and adjudicated upon fairly, with the national interest remaining a central theme, breaking down the restrictive practices which are still prevalent and, where necessary, effectively winding-up or (where tenable) restructuring failed businesses.
The result of such an approach may well be, amongst all sorts of other benefits, to reduce the impact of any downturn.
But is that likely to happen? There is plenty of experience in recent years of beautifully written modern PRC statutes remaining largely unenforced in areas which really count, or being "interpreted" elastically so as to rob them of their apparent meaning.
There is some cause for optimism. The huge efforts made to pass these laws will be wasted if they turn out to be fancy window-dressing and it seems highly unlikely that the government wants this outcome. The highly visible parallel programs of SOE share reform and overseas listing are also helpful trends which may in the long run reinforce this overhaul of the PRC’s legal machinery.
There are also, of course, significant political risks involved in grasping the nettle of permitting considerable restructuring and corporate failures.
Experience suggests that there remains a huge risk that special interests and short-term calculations will prevail in the cases which matter; it remains to be seen whether the relevant political will exists to overcome this.
Evidence of progress
Without pretending to predict how things will eventually play out, I suggest two things to look out for over the next few years as early indicators of likely success (or otherwise) in this important venture.
The first and most visible thing will be how the new laws are deployed in any early cases involving major SOEs.
The second, more subtle and more fundamental, factor will be the success or otherwise of the Supreme People’s Court’s declared plans to make the judiciary throughout China more independent of improper governmental influence.
If substantial progress can be made in that sphere over the next few years, at least in the economic context, the new laws may really make a difference. As always, it is the neutral, effective and transparent application of laws in practice which matters, not what they say on paper.