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Scholars Terry Halliday and Bruce Carruthers describe reasons why China was able to enact bankruptcy reforms on its own terms rather than submit to pressure from international financial institutions.

How did China resist efforts of powerful international financial institutions (IFIs) to pressure it into reforming its bankruptcy system?

Scholars Terry Halliday and Bruce Carruthers argue that in response to the Asian economic crisis, the world’s powerful international financial institutions mobilized in “unprecedented fashion” to address the financial and legal situation of affected states. Part of the effort of these powerful agents was focused on reforming bankruptcy law.

Bankruptcy law is integral to market operation since it regulates property rights and increases predictability in financial crises. So, part of the effort of IFIs and some Western States to address the Asian economic crisis was to attempt to transplant features of Western bankruptcy law into the Chinese legal system.

Foiling Transplant in China

Unlike some of its neighbors, China was less vulnerable to the Asian economic crisis (compare, for example, Indonesia and South Korea). Because of this, IFIs had no direct financial leverage. Additionally, foreign investors were in a weaker position in China than in other Asian countries. In order to have access to the worlds largest single market, investors knew they would have to accept short term losses and more risk than would be acceptable in other countries.

Institutionalization of China’s bankruptcy law did not begin with the Asian economic crisis. Since the 1980s there have been three phases of bankruptcy law development (1986, the early 1990s and beginning again in 1994 when the Finance and Economic Committee of the National People’s Congress was charged with creating a unified Chinese bankruptcy law). While other countries and IFIs had some influence on China’s bankruptcy law, this input came at China’s request and on China’s terms.

For example, China’s State Economic and Trade Commission (SETC), which administered state-owned enterprises, commissioned two reports regarding their bankruptcy law: one from the Asian Development Bank (in 1996), and one from the World Bank (2001).

Proposals of the Asian Development Bank

Asian Development Bank, in 1996, provided a series of recommendations regarding the recreation of the Chinese bankruptcy system (prepared primarily by lawyers). These included:

  • Drafting a unified bankruptcy law that included a strong regime for rehabilitating companies,
  • Creating specialized, independent bankruptcy courts,
  • Staffing bankruptcy courts with thoroughly trained judges,
  • Forming an insolvency practitioners’ profession,
  • Applying “recognized accounting standards,”
  • Proposing that the government consider a bankruptcy agency to handle "hopelessly insolvent" cases.

What happened to the ADB report? The report from the Asian Development Bank “disappeared from sight.” Even five years later senior officials at SETC did not know of its existence. The authors say, however, that it is not possible to determine whether this was deliberate or a matter of getting lost in the bureaucracy.

Proposals from the World Bank

A report from the World Bank was also commissioned by the SETC and was released in 2001. The report sang the praises of the current draft law which, it pronounced, "largely resembles the bankruptcy laws of developed market economies." It further urged the Chinese government to enact its draft bankruptcy law quickly.

Even though it was encouraged to enact its draft law quickly, the Chinese government delayed putting the bill before the Standing Committee of the National People’s Congress (NPC) until 2003. After successive readings, it was finally enacted in 2006 and became effective in 2007.

Why Did China Delay?

One significant feature of both the ADB and World Bank reports is that they acknowledge the challenges China could face by enacting their proposals. Neither IFI had enough leverage over China to be able to frame their proposals in “thou shalt” terms. Rather, the reports offered proposals while at the same time qualifying the proposals by explicitly acknowledging hurdles to implementation.

The Chinese government knew the bankruptcy law faced opposition from many quarters:

  • State owned enterprises might be exposed to the harsh currents of the market,
  • Banks had become accustomed to avoiding responsibility for bad loans since they were protected by the central government,
  • Provincial and municipal leaders often had, and continued to have, well-entrenched patronage relationships with local industry,
  • Workers' low wages had traditionally been compensated for by a cradle-to-grave welfare system.

China had two “deeper reasons” for the delaying the implementation of the bankruptcy law: the bureaucracy and the Party.

  1. If state owned operations (which had been outside bankruptcy laws) were included in the new law, it would diminish the influence of the SETC (which administered China’s state-owned enterprises),
  2. A market-based bankruptcy system faced heavy ideological opposition from the Party (which was opposed to a capitalist solution).

Finally, implementing the recommendations of the ADB and World Bank reports presupposed institutions that China did not yet have (such as a comprehensive welfare safety net for unemployed workers). Also, the bankruptcy reforms involved political risks (such as large-scale economic disaster and social unrest) that the Party would not tolerate.

Bottom Line

Unlike some other countries caught up in the Asian economic crisis, China was less and susceptible to the crisis and therefore less vulnerable to the pressure of IFIs to reform its bankruptcy system. Even though China solicited input from some IFIs and foreign governments in reforming their bankruptcy laws, China instituted the changes on their own terms and on their own timetable.

Data and Methods:

Data Source:

Based on interviews with actors involved in the development of international insolvency law.

Funding Sources:

American Bar Foundation.

Full Text Availability:
Available for purchase in

Halliday, Terence C., and Bruce G. Carruthers. 2007. "Foiling the Hegemons: Limits to the Globalisation of Corporate Insolvency Regimes in Indonesia, Korea and China." Pp. 255-301 in Law and Globalization in Asia Since the Crisis, edited by Christoph Antons and Volkmar Gessner. Oxford: Hart Publishing.

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