China Bankruptcies, Donald Trump, and Meaningless Numbers

Just read an interesting article by Reuters reporter John Foley. The article is entitled, You’ve Got Fail and it is a riff on something Donald Trump’s view on how China businesses are unwilling to fail:

Presidential hopeful Donald Trump says that bankruptcy in the United States is nothing to be ashamed of. In China, where high debt levels are also a concern, it’s the opposite: failure is to be avoided vigorously. These opposing views end in the same place. When going bust brings too much pain or too little, disaster can follow.

Trump, in a debate among Republican candidates for November 2016’s presidential race televised on Aug. 6, argued that four bankruptcies among his companies don’t disqualify him from looking after U.S. businesses. His thinking: laws are there to be used, and most entrepreneurs do. A look at the U.S. courts, which had 1.3 million bankruptcy cases pending at the end of June, suggests he has a point.

I generally agree. One of the great things about the U.S. is how many entrepreneurs there are who essentially look potential failures in the eye and don’t blink. Many years ago, I sat next to the founder of a very well known consumer company. This person told me of how this well known company was actually the fourth company of its type that he had founded and of how he didn’t really succeed until his forties. His first three companies had gone bankrupt and it was his persistence and his learning from his three failures that got him to where he is today. Well just as soon as I got home, I lectured my two daughters on how failure is not something to be avoided: doing nothing is what is to be avoided. That in many ways is the spirit of the United States.

I have heard (but do not know enough to back it up) that in Europe failure and bankruptcies are to be assiduously avoided. Way more so than in the United States. I have also heard (and have some daily life experiences to back it up) that filing for bankruptcy is generally much more difficult in most European countries than in the United States.

Now just to be clear. I have no idea how much culture influences a willingness to take risks and to file for bankruptcy (those are two different things, I realize) and how much bankruptcy laws influences that. But I can tell you that a country’s bankruptcy laws must have some impact on the culture of risk and of bankruptcy within the country and I can most emphatically tell you that a country’s bankruptcy laws influence the number of bankruptcies that get filed in any given country.

Which brings us back to Donald Trump and to China and to China bankruptcies.

Based on my decades of experience with China as a China lawyer, I would NOT describe Chinese businesspeople as risk averse. In fact, nearly all of the time when my law firm is representing an American company doing a deal with a Chinese company, we are the ones encouraging caution and taking time, in large part as a counter to the Chinese side which can too often seem oblivious to the risks and just want to go go go.

But this article paints China with a very different brush

Ease of going broke brings risks. While several Wall Street institutions were spared bankruptcy in 2008 on the grounds they were too big to fail, most are too small to matter. A study by the Chicago Booth School of Business suggested that for households with few assets, declaring bankruptcy can be a cheaper way of meeting healthcare costs than buying insurance. The ease of getting into debt, and getting out of it, may help explain U.S. public and private borrowings that McKinsey calculates at 269 percent of GDP.

In China, the opposite feeling has created a similar result. Bankruptcy cases are rare. Credit insurer Euler Hermes estimated in January that there might be fewer than 3,000 this year, but it’s not for want of overstretched borrowers. Debt is now 282 percent of GDP according to McKinsey. Solar panel makers, coal miners and real estate companies have been saved by governments, or just borrowed more through deceptively safe-seeming products sold in the mass market. A borrower knows that even if politicians won’t save the company, they will definitely save retail investors.

For countries with high debts and inflated asset prices, getting failure right matters a lot. The best path is somewhere in the middle: make bankruptcy painful, but not so much that it has to be prevented at all costs. It’s a challenge that neither country looks close to mastering.

First off, I am not so sure that filing for bankruptcy is too easy in the United States, but I will have to leave that discussion to those more knowledgeable on this issue than me. But I can say that the number of bankruptcies in China is not a terribly good indicator of the willingness of its businesspeople to take risks and that may in large part be due to the fact that it is not even a terribly good indicator of the number of company’s that “go bankrupt,” in the layman’s sense of the word. What the writer of this story does not account for is that filing bankruptcy in China is so convoluted and difficult and being granted bankruptcy relief so rare, that virtually nobody files for it. Instead, Chinese businesspeople just walk away from their failing businesses, leaving a trail of debt (employee and vendor and government) behind them. Again, all I can do here is draw on the collective real world experience of the China attorneys in my law firm, but in our existence we have been involved with one true China bankruptcy and yet we have seen dozens of companies in China just “disappear” over the years. In particular, during the recession we were constantly dealing with situations where our American clients had been stiffed by Chinese companies that had disappeared, usually right after receiving a payment to manufacture a product.

So what I am saying is that if you are going to analyze China’s culture for risk, using the numbers of bankruptcies actually filed there is not a good way to do so.

What do you-all think?

The post China Bankruptcies, Donald Trump, and Meaningless Numbers appeared first on China Law Blog.

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