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Jonathan Addo
Jonathan Addo
  • Jonathan Addo

  • Partner
  • British Virgin Islands
Jeremy Child
Jeremy Child
  • Jeremy Child

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Julie Engwirda
Julie Engwirda
  • Julie Engwirda

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Peter Ferrer
Peter Ferrer
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  • British Virgin Islands
Claire Goldstein
Claire Goldstein
  • Claire Goldstein

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Hazel-Ann Hannaway
Hazel-Ann Hannaway
  • Hazel-Ann Hannaway

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Nick Hoffman
Nick Hoffman
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  • Cayman Islands
Andrew Johnstone
Andrew Johnstone
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Paula Kay
Paula Kay
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Phillip Kite
Phillip Kite
  • Phillip Kite

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Vicky Lord
Vicky Lord
  • Vicky Lord

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  • Shanghai
Paul Madden
Paul Madden
  • Paul Madden

  • Partner
  • Cayman Islands
Henry Mander
Henry Mander
  • Henry Mander

  • Partner
  • Cayman Islands
Ian Mann
Ian Mann
  • Ian Mann

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William Peake
William Peake
  • William Peake

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  • London
Lorinda Peasland
Lorinda Peasland
  • Lorinda Peasland

  • Consultant
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Chai Ridgers
Chai Ridgers
  • Chai Ridgers

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Nicola Roberts
Nicola Roberts
  • Nicola Roberts

  • Partner
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  • Singapore
Paul Smith
Paul Smith
  • Paul Smith

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  • Cayman Islands
Andrew Thorp
Andrew Thorp
  • Andrew Thorp

  • Partner
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Jessica Williams
Jessica Williams
  • Jessica Williams

  • Partner
  • Cayman Islands
Jayson Wood
Jayson Wood
  • Jayson Wood

  • Partner
  • Cayman Islands

Deleveraging the Dragon

Insolvent Restructuring in Mainland China is booming, and contiguous to this, Hong Kong SAR professionals and offshore professionals cannot hire fast enough to keep up with the pace. 

But this is no ordinary Western style “boom and bust” restructuring, even though China does, of course, suffer similar cycles as a matter of economic theorem. Best described as “harmonious restructuring”, China’s approach to insolvency in a command economy is arguably unprecedented. “Harmony”, that cherished Confucian ideal, and the bedrock of modern Chinese governance, has never been so badly misunderstood by Western economists and insolvency professionals.

Tightening liquidity, long overdue in China, is the calculated shortening of the reins around the Dragon.  Corporates are already feeling the squeeze with the high cost of borrowing – the Shanghai interbank rate is 4.09% compared to 1.1.% in the US – despite a seemingly loose monetary environment. No one should be surprised by this, since China’s debt, amounting to 268% of GDP in 2017 – more than twice that of the US – could never be allowed to continue.

Since the 19th Congress of the Communist Party of China in October, the central bank and the banking regulator have published numerous policies directed at tightening controls over hidden debt problems in the shadow banking system. The shadow banking system, driven by quasi-financial institutions, relies upon creative “off balance sheet” vehicles such as “wealth management products”, peer-to-peer lending, insurance products and “capital tools”.

The Government is seeking to reduce unprecedented debt levels in the Mainland economy in a bid to switch from unsustainably fast-paced growth to a more sustainable growth model. It is predicted that the Mainland will see the first bond default by a local government in 2018 as part of Beijing’s great deleveraging exercise to reduce financial risk. This is hugely significant since it had long been believed that Central Government would always prop-up its provincial counterparts – usually spending wildly in infrastructure projects – and which have often showed poor fundamentals that would otherwise not have attracted lenders.

At the same time, the Dragon has changed direction. It has begun to breathe fire West, across an ancient route through the Taklimakan Desert, bounded by the Kunlun Mountains to the South and the Pamir Mountains to the North, once known as the Silk Road, now known as the “Belt and Road Initiative”.  We are about to see the effects of the greatest infrastructure project in history, affecting 65% of the world’s population, driven, in part, by a Chinese economy with over capacity.

Restructuring within a trajectory of de-leveraging and the increased cost of borrowing, coupled with Central Government’s control over local government, banks, and corporates, requires consensus-building over a stakeholder group not known in Western restructurings. It requires patience, an intimate knowledge of the unwritten and unspoken; and immense vision. It requires the judiciary of the Courts of some of the world’s greatest restructuring centres to be innovative when dealing with China elements. The opportunities are boundless.

 

Offshore Rig

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