This content is from: Local Insights

China

On October 6 1998 the People's Bank of China ordered the closure of a non-bank financial institution, Guangdong International Trust and Investment Co (GITIC). Although this has worried foreign financial institutions and the media, it must be seen as a significant step towards a market economy and the implementation of the rule of law.

GITIC is an independent legal entity. Therefore, GITIC - not the state - is liable for all its debts with all its assets. On the closure of GITIC, the Bank of China gave notice that it would be handling the liquidation and payment of debts. This does not mean that the Bank of China takes over the debts of GITIC, only that it acts as the legal liquidator.

Foreign creditors will have to consider that granting loans to or taking guarantees from Chinese financial institutions such as GITIC requires compliance with a number of contractual, approval and registration rules. Only foreign currency loans for which all foreign exchange registration procedures have been carried out will be taken into consideration as debts of GITIC in its liquidation procedures. Thus, only debts which are valid and enforceable under Chinese law can be registered in liquidation.

The Bank of China has set a deadline in accordance with Chinese liquidation and bankruptcy laws that all debts must be registered within three months of the issue of the notice of liquidation. During this period no payments will be made for any debts of GITIC. No priority with respect to the timing of registration will be granted. Priority will only be granted according to the nature of the debts, ie liquidation expenses, salaries, taxes and other claims. Surprisingly, the Bank of China stated in its notice on GITIC's closure that registered foreign debts will be paid in priority over domestic debts. The legal basis for this priority is still not apparent.

The reaction to the closure of GITIC is vehement, given the financial implications of further closures and liquidation of a number of other financial institutions. However, it is difficult to account for the surprise in financial circles that non-registered foreign debts will not be honoured because this is a result of the implementation of the rule of law.

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