This WSJ Blog, arguing that more Chinese companies should go
bankrupt got me thinking about the cultural assumptions and history that
underlie our own bankruptcy code.
China enacted its current bankruptcy law, roughly modeled on
the American law, in 2007. The blog points out that despite a number of recent
defaults in the real-estate sector, there have been no major bankruptcies in
recent years.
The following are some broad
generalizations on cultural/historical influences in China that seem to lead to
dramatically different uses of two similarly drafted bankruptcy laws:
1. In China, there is
a tradition of “saving face” which makes bankruptcy an especially unpalatable
option for “successful” businesspeople.
In Silicon Valley, failure is expected, if not celebrated, as part of
the process of innovation and progress. In China, public failure seems to
elicit stronger feelings of shame, and the article points out that failed
businessmen often flee rather than face the music.
2. There is built in
conflict between local and centralized interests within the Chinese state. The article points out that the central
government may be increasingly open to the idea of bankruptcy, but local
officials have an incentive to drive local economic growth by papering over
failed companies with shady accounting and bad loans. In the US, the federal courts
oversee the process, using state rules to determine many of the property
issues.
3. Both of the above
issues stem from very different legal/commercial histories in each country. In
the US, bankruptcy is baked into the Constitution, and thus practically given
the stamp of approval from the Founders. The decisions of bankruptcy courts are
informed by hundreds of years of commercial law. In China, on the other hand,
commerce as we know if didn’t really start until the 1990s. The bankruptcy law
is less than a decade old, and there is sparse legal infrastructure with which
to build the up the institution. This might be an even more pressing issue that
cultural differences.
I’ll leave you with a delightful analogy/metaphor from Mr.
Chan, a real estate developer who believes that more bankruptcies would
strengthen the market:
“’You need to use the toilet every day,’ said Mr. Chan. ‘You
have to discharge something.’”
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