BEWARE THE FIRE OF THE DRAGON

 
By Neil McDonald
Thursday, December 07, 2006
 
 
In the past six years more than 241,000 foreign invested enterprises have been set up in China with an actual utilised foreign investment value of more than $367bn. This has stimulated unparalleled economic growth which has in turn continued to attract further foreign investment.

The rationale for foreigners investing in China's buoyant economic cycle has been compelling. But what happens when the cycle turns, as it must? How will foreign investors fare if there is a recession?

It is not a subject that investors like to talk about. A recession is likely to mete out harsh lessons. Putting money into China is (relatively) easy. Getting money or assets out is not.

Investors should be mindful of this when structuring their deals. There is a saying in China that one should not be planning a divorce before
a marriage. Thinking about exit options in respect of investments in China might be seen as being equivalent to entering into a pre-nuptial agreement.

So what will be the issues facing investors in a distressed market? China only recently passed its new Bankruptcy Law and it will not come into force until July next year. While the introduction of this law is
a step forward, the Chinese courts and bureaucracies lack experience with bankruptcies and distressed situations – which will be inevitable in a recession.

At present, the claims of foreign creditors are usually subordinated to those of local parties and assets
of a distressed enterprise are usually frozen in a haphazard manner on a first-come, first-served basis.

Foreign shareholders and even creditors are inevitably at the end of the queue. The rule of law in China is fragile. The courts are often influenced by local parties and interests. Indeed, judges in many local courts are not even legally trained.

The cocktail of government pressure, protection of local interests and employees, corrupt local officials, an underdeveloped and less than transparent legislative framework and legal system, strict foreign exchange laws and an unwieldy bureaucracy is problematic in good economic times – it will be disastrous in a recession.

The unfortunate consequences of collapses in China for foreign investors have already been borne out in high-profile cases such as GDE, GITIC and Zhu Kuan. These cases preceded the massive investment that has occurred in the past 10 years. A major recession will place an enormous burden on an untested and already-fragile legal system.

There are enormous opportunities for investors in China. Investors chasing these opportunities should, however, be mindful of the risks that exist in any emerging market.

Planning for an exit is the key when placing money in China. Those that do not will be burnt by the fire of the dragon.

在华投资的“婚前协议”

 
作者：路伟律师行香港办事处合伙人 尼尔•麦克唐纳(Neil McDonald)
2006年12月7日 星期四
 
 
过
去6年来，逾24.1万家外资企业在中国设立，实际利用外资金额超过3670亿美元。这刺激中国经济实现了规模空前的增长，反过来又吸引了更多的外资。

外国投资者之所以在中国经济周期的上升阶段进行投资，其理由极具说服力。但在这一周期出现拐点时（这种情形肯定会出现），会发生什么情况呢？如果出现经济衰退，外国投资者将会怎样？

这不是一个投资者愿意谈论的话题。经济衰退可能会带来惨痛的教训。在中国投资（相对而言）比较容易。而将资金或资产抽离就不那么容易了。

在安排交易的时候，投资者应留心上述问题。中国有句俗话，说的是不要结婚前就想着离婚。在华投资方面，考虑退出时的方案，或许可以被视作相当于达成一项“婚前协议”。

那么在一个出现麻烦的市场中，投资者将会面临什么问题呢？中国最近刚刚通过新《企业破产法》(Bankruptcy Law)，将于明年6月起实施。尽管该法律的出台是中国的一个进步，但该国法院和政府机构缺乏处理破产和问题境况的经验——在出现经济衰退时，这些情况是不可避免的。

目前，外国债权人的清偿要求通常排在国内债权人之后，而破产企业的资产常常被随意冻结，遵循的是“先到先得”的原则。

外国股东乃至债权人无可避免地排在最后。中国的法律规定颇为脆弱。法院常常受到本地各方和利益的左右。实际上，许多地方法院的法官甚至没有接受过法律方面的培训。

来自政府方面的压力、对地方利益和雇员的保护、贪污腐败的地方官员、不够健全且缺乏透明的立法框架和法律体系、严格的外汇管理法规和难以应付的官僚作风，这些因素混合在一起，在经济繁荣时期是一些问题——而在经济衰退时期，它们则将是灾难。

对外国投资者而言，中国企业倒闭所带来的不幸后果，从一些引人注目的案件中可见一斑，例如粤海投资(GDE)、广东国际信托投资公司(GITIC)和珠光(Zhu Kuan)等破产案。这些案件发生在过去10年来的大规模投资之前。如果发生严重的经济衰退，将给没有经受过考验和本已脆弱不堪的法律体系造成严重负担。

对投资者而言，中国存在着大量的机遇。然而，寻求这些机遇的投资者，应留意到那些任何新兴市场中都存在的风险。

在中国投资时，留好退路是关键所在。那些没有准备的人，将会被这条中国巨龙喷出的火焰所灼伤。