The Second Session of the Tenth National Committee of the Chinese
Proposal on “The Handling of Overseas Loans Secured by Local Governments”
Proposal: “The Handling of Overseas Loans Secured by Local Governments”
Primary Proposer: Eric Li Ka-cheung, CPPCC member
Discussion Group: 49 (Hong Kong)
Contact Number: (852)28274336 For Public Release: Yes
Government department(s) expected to take follow-up action (for reference): People’s Bank of China, Ministry of Finance, Ministry of Foreign Trade & Economic Co-operation, the Supreme People’s Court
Submission Date: March 5, 2004
The Handling of Overseas Loans Secured by Local Governments
Since the implementation of the policy of opening up and economic reform on the mainland, local governments have set up a number of foreign-related commercial organizations locally, and established subsidiary bodies and businesses in Hong Kong and Macau, some of which are listed in Hong Kong.
These foreign-related commercial organizations obtained legal loans from overseas financial organizations in Hong Kong, either guaranteed by local governments in the form of undertaking or with security (normally land resources). While most of these enterprises would invest the funds in developing their own businesses, a few appropriated part of the funds and invested them in municipal infrastructure lacking commercial value.
Since the financial turmoil in Asia, probably due to their deficient management and other reasons, some of these local government owned foreign-related commercial organizations have run into financial difficulties and were unable to repay the principal and interest on their loan to the creditor banks or financial organizations. As a result, the borrower and lender came into commercial dispute. A minority of these enterprises even had to undergo debt restructuring in accordance with the laws of Hong Kong and foreign countries, or enter into a court driven insolvency procedure in Hong Kong.
All these are basically commercial problems which can be resolved through normal commercial means or judicial procedures should there be no direct participation by the Government. However, in the complaints received from and cases referred by professional accountants engaging in debt restructuring and insolvency businesses in Hong Kong, the primary proposer acknowledged that some mainland municipal organizations transferred their assets through covert activities by fair means or foul when they were still engaging in a friendly and proper negotiation with the creditor on the repayment terms. In other cases, some senior officials in these enterprises took advantage of their close relationship with the local administrative and judiciary departments of the mainland to transfer their assets through executive means. These activities, in violation of the rule of law upheld by the central government, were further covered up as projects essential for local development and city planning. These senior officials sometimes even refused to cooperate with representatives appointed by the Hong Kong court, or to provide transaction records and proofs. As a result, the creditors were unable reasonably to recover their debt in accordance with the law, and eventually suffered from severe loss.
The emergence of these problems not only made investors who placed billions of dollars in their investments feel aggrieved, but professionals engaging in debt settlement also felt helpless and upset when faced with the uncooperative attitude of the municipal administrative and judiciary departments, which knew the ways to get around the government policies. Furthermore, these incidents were frequently reported negatively by Hong Kong and overseas media, harming the national reputation and weakening investors’ confidence in their investments in the mainland.
The local governments involved of course claimed that all the asset arrangements were rational and legal, and were made to meet the objectives of local development and planning. However, their defence was not acceptable according to the international insolvency practice. Even though the asset arrangement was made to address local needs, it was still unconvincing for international investors to accept their acts of transferring or taking back the assets involved in debt settlement, while the ownership of the assets was still in the process of mediation or judicial procedure. The adverse effect on the investment environment nationwide could be enormous.
To protect the reputation of the country and to ensure the realization of the commitment made by local governments, I suggest that, in the long term, laws and regulations on insolvency should be continuously improved so that creditors are clear about their rights and can make reference to the law while local administrative organisations are also clear about their duties. No more attempt should be made to ease their financial plight through unfair means directed at creditors with the principle that “politics outweighs the law”.
In the short term, immediate measures should be taken, with the People’s Bank of China taking the lead to establish an ad hoc group with representatives from the Ministry of Finance, the Ministry of Foreign Trade & Economic Co-operation and the Supreme People’s Court. The group would address complaints from foreign investors within a definite period of time, i.e. 1 year, and appoint an ombudsman to the respective location to conduct an investigation to determine the validity of the complaint. It is also useful to allow the complainant to provide funding for employing independent professionals (in the field of accounting, law, finance etc) to assist the ad hoc group in the investigation. If there are legitimate grounds for the complaint, the group should either monitor the debt settlement procedures involving the local departments and the creditors, to ensure that they are done in accordance with the law, or assist both parties in reaching a voluntary and mutually agreed solution. When necessary, the group could also help the creditors to lodge an appeal and seek judicial reviews with the judicial department at a level higher than the local judiciary.
It is believed that the proposal would help the central government to strengthen and improve the existing efforts to attract foreign funds, while clearing up the misunderstandings the investors have had about local governments. This proposal can also help restore the nation’s reputation of “keeping one’s promise by repaying what one’s borrowed”. Besides, the Guarantee Law could also be strictly enforced to ensure that the issue of attracting foreign investment is properly addressed in a fair and impartial manner, and the legitimate rights of foreign investors are well protected.