China needs to let more companies go bust.
That was the message from several executives at a real-estate conference in Shanghai on Thursday, as the latest string of loan defaults among real-estate developers and a small construction firm have some people talking about bankruptcy more freely.
It’s crazy that China hasn’t had a major bankruptcy in recent years, said Ronnie Chan, chairman of Hong Kong-listed property developer Hang Lung Group.
Although the country has a bankruptcy code somewhat similar to that in the U.S., it’s rarely used. Borrowers sometimes flee rather than try to work out problems under bankruptcy law, and there are few judges, administrators or lawyers who specialize in the field.
Last month, property developer Zhejiang Xingrun Real Estate Co. couldn’t repay nearly $600 million of loans. Local officials in Fenghua, the eastern city where the developer is based, are worried that a bankruptcy could hurt the city’s reputation and have said they’ve set up a task force to deal with the outstanding debt and remaining land assets.
On Wednesday, a Shenzhen-listed shipbuilder said property firm Nanjing Fudi Property Developing Co. has failed to repay 105.4 million yuan ($16.9 million) loan, including interest.
While China has seen developers default before, government officials have arranged bailouts for troubled firms that allow their underlying financial problems to fester. On Thursday, analysts argued that authorities have to be willing to address the other option: Let the companies go broke, and send a warning to markets, even if it leads to some financial turmoil in the near term.
Mr. Chan argues that real-estate firms declaring bankruptcy isn’t a social problem. “Another firm takes over the land or project, and no one has to be fired.”
Developers and government officials must be “forced to accept reality,” he said.
To be sure, the developer isn’t saying massive waves of bankruptcies are the way to go either. This is acceptable as long as not too many companies go broke at the same time and doesn’t result too much disruption, Mr. Chan added. In other words, they don’t want a “Lehman Brothers” moment.
“That’s why we prune trees,” said John Allen, chief executive officer of private investment firm Greater China Corporation in a later speech. “Bankruptcy is one of the healthiest things around. You want to get rid of the weak players.”
via Why China Needs to Let More Companies Go Bankrupt – China Real Time Report – WSJ.