Observation and Prospect of Annual Debt Restructuring Market: Multiple Measures, Normalization, and Deepening

LABEL： Debt restructuring ,

Since the reform and opening up, China's economy has experienced more than 40 years of high-speed growth, and has now shifted from the stage of high-speed growth to the stage of high-quality development. The debt risk accumulated during the high-speed growth stage has been increasingly evident in recent years, and the non-performing assets of financial institutions have been continuously increasing. At present, in order to deepen the supply side structural reform and promote high-quality economic development, implementing systematic and high-quality debt restructuring in key areas with debt risks in China's economic and social development process is one of the important focuses.

Since the 1990s, King&Wood Mallesons has been involved in debt restructuring for some large corporate groups in China; After the implementation of the Enterprise Bankruptcy Law in 2007, King&Wood Mallesons has been actively involved in the debt restructuring market, undertaking and participating in a large number of large-scale corporate debt restructuring cases including HNA Group, Ziguang Group, Bohai Iron and Steel, Yongtai Energy, Salt Lake Group, Yurun Group, Baoshang Bank, Xinhua Trust, etc., as well as undertaking a large number of "three no" and small and medium-sized enterprise bankruptcy liquidation cases. Jindu Debt Restructuring Department has been focusing on the field of debt restructuring for over 30 years and has accumulated rich practical experience in debt restructuring. In order to provide useful reference for China's debt restructuring practice and to better serve the debt restructuring market, and based on specific cases of debt restructuring undertaken in the past, we will conduct a review and observation analysis of the debt restructuring market for the year 2023, in order to provide suggestions and recommendations for relevant legal construction, business environment improvement, and improving the quality of debt restructuring.

catalogue

1、 Overall Observation of China's Macro Debt Situation in 2023

（1） Macroeconomic situation in 2023

（2） The key areas where debt problems currently exist in our country

（3） Measures implemented by China to resolve and prevent debt problems in key areas

（4） Debt Restructuring Practice in 2023

（5） Observation of the Effectiveness of Debt Restructuring Practice

2、 Specific Observations from the Perspectives of Various Participants in the Debt Restructuring Market

（1） The Debtor's Perspective on Debt Restructuring Market Observation

（2） From the perspective of creditors in observing the debt restructuring market

（3） Investor Perspective on Debt Restructuring Market Observation

（4） Shareholders' Perspective on Debt Restructuring Market Observation

（5） Observation of the Debt Restructuring Market from the Perspective of Employees

3、 Observation from the Perspective of Legal System Construction in Debt Restructuring Market

（1） Revision of Bankruptcy Law

（2） Exploration and improvement of regulatory rules for bankruptcy reorganization of listed companies

（3） The formulation and refinement of rules and regulations related to debt restructuring in other aspects

4、 Outlook for the Debt Restructuring Market in 2024 and Suggestions for Promoting Debt Restructuring Practices

（1） Outlook for the Debt Restructuring Market in 2024

（2） Thoughts on Promoting Debt Restructuring Practice
1、 Overall Observation of China's Macro Debt Situation in 2023
（1） Macroeconomic situation in 2023

The year 2023, which has just passed, is a year of economic recovery and development in China after three years of transition in the prevention and control of the COVID-19 epidemic. Looking back on the past year, China's economy has emerged from a difficult recovery curve under sustained pressure. The Central Economic Work Conference held in December 2023 pointed out that the basic trend of China's economic recovery and long-term improvement has not changed, and the high-quality development of the economy has been solidly promoted. According to the 2024 Government Work Report, China will achieve a year-on-year growth of 5.2% in Gross Domestic Product (GDP) in 2023, with a GDP exceeding 126 trillion yuan, which is a hard won achievement.

While acknowledging our achievements, we should also recognize that our country's economic development still faces certain difficulties and challenges. As stated in the 2024 Government Work Report, the global economic growth momentum is insufficient, regional hot issues are frequent, and the complexity, severity, and uncertainty of the external environment are increasing. The foundation for the sustained recovery and improvement of China's economy is not yet stable, with insufficient effective demand, overcapacity in some industries, weak social expectations, and still many risks and hidden dangers. There are bottlenecks in the domestic circulation and interference in the international circulation. Some small and medium-sized enterprises and individual businesses are facing operational difficulties. The pressure of total employment and structural contradictions coexist, and risks and hidden dangers such as real estate, local debt, and small and medium-sized financial institutions are highlighted in some places.

As China's economy shifts from high-speed growth to high-quality development, it is necessary to properly handle the debt problem in the economy and society. In the stage of rapid economic growth, the overall credit expansion of society is conducive to driving investment, consumption, and exports, achieving rapid growth of the national economy. With the increase of credit scale, a large amount of funds flow into the production and consumption sectors, driving asset prices to continue rising, which in turn continues to drive credit expansion, presenting a spiral growth trend. The rapid expansion of credit means the continuous inflation of interest rates. During periods of rapid economic growth, corporate profits and household income continue to increase, and the pressure to repay debts is not yet apparent. As the economy shifts towards a stage of high-quality development, the economic growth rate slows down, and the growth rate and expectations of corporate profits and household income also decrease, further highlighting the pressure and problems of debt repayment. At the same time, the pressure of debt repayment is gradually increasing, and the private sector may shift from credit expansion to savings for debt repayment. Business investment and household consumption are slowly shrinking, and demand is shrinking while asset prices are falling. Financial institutions are more cautious in their credit allocation, and the spiral process of debt contraction may slowly begin. If this debt contraction process lasts too long, it may affect the economic development to maintain an appropriate growth rate.

To maintain an appropriate economic growth rate and achieve a virtuous cycle of growth between residents' income, investment and consumption, and credit expansion, it is necessary to implement rapid and effective debt restructuring in sectors and fields that have already experienced debt risks, resolve crises in a timely manner, and avoid debt risks spreading to a larger scope and longer period. If the spread of debt risks cannot be effectively curbed, with the continuous accumulation of debt burdens such as interest and penalty interest, as well as the existence of accounts receivable and payable transactions between enterprises, it may lead to more enterprises falling into debt crises, resulting in more and more layoffs and salary cuts, continuous decline in residents' income and expectations, leading to consumption contraction, stagnant corporate investment, and gradual decline in the profitability of market entities, which may ultimately affect the high-quality development of the economy.

In order to create a stable social environment and achieve the goal of high-quality economic development, this year's "Government Work Report" has identified the pulse and direction. One of the key points is to address both the symptoms and root causes, and coordinate the resolution of debt risks in key areas such as real estate, local debt, and small and medium-sized financial institutions. Through the implementation of systematic and high-quality debt restructuring work, we will firmly hold the bottom line of preventing systemic risks from occurring.
（2） The key areas where debt problems currently exist in our country
1. Debt problems faced by the real estate industry

Since 2021, with the arrival of the population turning point and the urbanization rate exceeding 65%, the supply and demand relationship in the real estate market has undergone structural changes. In 2023, the sales revenue of commercial housing in China was about 1.166 trillion yuan, a year-on-year decrease of 6.5%. The sales area of commercial housing was about 1.117 billion square meters, a year-on-year decrease of 8.5%. Meanwhile, the area of existing commercial housing on the supply side is still increasing. In 2023, the construction area of housing in China was 8.384 billion square meters, with a completion area of approximately 998 million square meters. As of the end of 2023, the unsold area of commercial housing was 673 million square meters, a year-on-year increase of 19.0%, of which the unsold area of residential housing increased by 22.2%. According to data from the China Index Research Institute, in 2023, the sales and transaction areas of residential land in 300 cities across the country will decrease by 22.4% and 23.1% year-on-year, respectively. The monthly approved listing area of commercial residential properties in 50 representative cities will decrease by about 11% year-on-year.

In the past, China's real estate industry mainly relied on "high leverage, high turnover, and high debt" to achieve rapid expansion. In the past two years, with financing and sales not meeting expectations, the risk of debt default for real estate companies will further intensify in 2023. Among the top 50 real estate companies in terms of sales revenue in 2023, a total of 12 companies have defaulted on their debts. According to publicly disclosed data from the 2023 semi annual report, the 12 real estate companies involved in debt defaults have a total debt scale of 7.82 trillion yuan.

Meanwhile, according to data from Tonghuashun, approximately 8 A-share listed companies in the real estate industry that belong to Tonghuashun in 2023 were delisted due to reasons such as stock prices below 1 yuan; About 13 Hong Kong listed companies in the real estate industry, which belongs to the GICS (Global Industry Classification Standard) in 2023, were delisted due to reasons such as failure to resume trading in a timely manner after being suspended from trading.
2. Some small and medium-sized financial institutions are experiencing operational crises

During the period of rapid economic growth, in order to meet the financing needs of different groups and social classes, China has successively established a large number of small and medium-sized financial institutions. These small and medium-sized financial institutions have relatively weak risk control awareness and poor credit asset quality. Against the backdrop of slowing economic growth, the non-performing loan ratio is gradually increasing. At the same time, some private small and medium-sized financial institutions have fallen into bankruptcy due to the debt crisis of their shareholders or related parties, such as Baoshang Bank, Liaoyang Rural Commercial Bank, Taizihe Village and Town Bank, Yi'an Property and Casualty Insurance, Xinhua Trust, etc., which were affected by the debt crisis of large enterprise groups such as "Anbang Group", "Tomorrow Group", and "Zhongwang Group" and were implemented for bankruptcy.

According to publicly available information, more than 60 small and medium-sized financial institutions and similar financial institutions were subject to risk management in 2023 due to operational and debt crises, mainly through bankruptcy liquidation to clear the market. The types of institutions are mainly concentrated in smaller and weaker risk resistant institutions such as trust companies, finance companies, financing guarantees, small loans, pawnshops, etc.
3. Some local governments have excessive debt, and urban investment platforms face significant debt repayment pressure

As of the end of 2023, the general debt balance of local governments in China is 15.87 trillion yuan, and the special debt balance is 24.87 trillion yuan. Among them, the balance of local debt in Guangdong, Shandong, Jiangsu, Zhejiang, and Sichuan provinces exceeds 2 trillion yuan. At the same time, urban investment companies in various regions serve as commercial platforms for local investment and financing, undertaking important financing functions through bank loans, issuing bonds, and other means. According to data from Tonghuashun, as of the end of 2023, the total amount of interest bearing liabilities of urban investment companies in various regions is 53.86 trillion yuan, and the balance of issued bonds is about 15.11 trillion yuan. Among them, the total amount of interest bearing liabilities of urban investment platforms in nine provinces including Jiangsu, Zhejiang, Sichuan, and Shandong exceeds 2 trillion yuan.

In the context of high debt on urban investment platforms and the transmission of downward pressure on the real estate industry, 2023 has become the year when urban investment bonds are converted into bonds. In the first half of the year, due to the impact of land transfer revenue, regional fiscal pressure increased, leading to pressure on the debt side and frequent risk public opinion. Although bonds issued by urban investment platforms have not experienced substantial defaults under the premise of local government credit endorsement, there have been multiple instances of technical defaults, and non-standard debt defaults have occurred frequently. According to statistics from Tonghuashun, there will be a total of 41 non-standard default products involving urban investment platforms by financing parties in 2023.
（3） Measures implemented by China to resolve and prevent debt problems in key areas

On February 15, 2023, Qiushi magazine published an important article titled "Several Major Issues in Current Economic Work". The article emphasizes that in 2023, there will be a myriad of economic tasks that need to be addressed from a strategic perspective, focusing on the main contradictions and carrying out work with a clear vision. At the same time, the article points out that in order to effectively prevent and resolve major economic and financial risks, it is necessary to adhere to the principle of treating both the symptoms and root causes, combining the near and far, and firmly holding the bottom line of preventing systemic risks from occurring. One is to prevent systemic risks caused by the real estate industry, two is to prevent and resolve financial risks, and three is to prevent and resolve local government debt risks.

In order to implement the requirements of the Central Committee of the Communist Party of China to firmly guard against systemic risks, the 2024 Government Work Report clearly states that one of the important tasks of the Chinese government in 2024 is to address both the symptoms and root causes of risks in real estate, local debt, small and medium-sized financial institutions, and maintain overall economic and financial stability. At the same time, it is necessary to improve the overall coordination mechanism for major risk disposal, consolidate the responsibilities of enterprise entities, departmental supervision, and local jurisdiction, enhance disposal efficiency, and firmly hold the bottom line of preventing systemic risks from occurring. Optimize real estate policies, provide equal support for the reasonable financing needs of real estate enterprises of different ownerships, and promote the stable and healthy development of the real estate market. Coordinate the resolution of local debt risks and stable development, further implement a package of debt reduction plans, properly resolve existing debt risks, and strictly prevent new debt risks. Safely promote the risk management of small and medium-sized financial institutions in some areas.

The Central Committee of the Communist Party of China and the State Council attach great importance to the resolution of debt problems and hold the bottom line of preventing systemic risks. This is the overall goal of resolving debt risks; Grasping the main debt risk contradictions and concentrating efforts to solve debt problems in the three major areas is the headquarters for solving debt problems; The overall tone for dealing with debt issues is to address both the symptoms and root causes, and to combine the near and far, and promote the resolution of debt problems through economic development. In 2023, the Party Central Committee and the State Council have taken a series of measures to resolve and prevent debt risks in key areas:
1. Implement financial regulatory system reform and comprehensively strengthen financial supervision

Through observation and analysis of some small and medium-sized financial institutions that have already fallen into operational and debt crises, the common factors that lead to risks for these institutions mainly include: firstly, in order to obtain high interest income and compete with strong large financial institutions to acquire customers, inadequate risk control measures are taken in the process of conducting business, extensive operation, and high risk of customer default; Secondly, the internal management is chaotic, the governance system is incomplete, and some private financial institutions have ineffective corporate governance, resulting in them becoming "ATMs" for related parties such as controlling shareholders; The third issue is the inadequate financial supervision in some areas, which has failed to promptly investigate and rectify the illegal operations of financial institutions within their jurisdiction. Therefore, in order to effectively prevent risks for small and medium-sized financial institutions, achieve stable operation of small and medium-sized financial institutions, and learn from the experience and lessons of institutions that have already experienced accidents, for small and medium-sized financial institutions, at the level of corporate governance, they should continuously optimize and improve the corporate governance system, strengthen their sense of responsibility, and form effective supervision and constraints on shareholders and management; At the business level, we should adhere to our main business, ensure compliant operations, implement risk control measures in the process of business development, and improve our operational level. For regulatory agencies, it is necessary to increase regulatory efforts, achieve regulatory normalization, resolutely punish violations, and take decisive measures against institutions involved in accidents to avoid the spread and transmission of risks. At the same time, in response to the small and scattered characteristics of small and medium-sized financial institutions, regulatory authorities can timely promote mergers and reorganizations of small and medium-sized financial institutions to enhance their ability to sustain operations and resist risks.

In order to effectively resolve the current problems and risks in the financial sector and firmly maintain the bottom line of preventing systemic risks, relevant government departments have mainly taken the following measures in 2023:

One is to implement regulatory system reform and form a new regulatory system.   On May 18, 2023, the State Administration of Financial Supervision and Administration officially went public, implementing unified supervision and management of the financial industry except for the securities industry in accordance with the law, strengthening institutional supervision, behavioral supervision, functional supervision, penetrating supervision, and continuous supervision, and maintaining the legal and stable operation of the financial industry.

The second is to improve the formulation of regulatory rules and regulations. To comprehensively strengthen financial supervision, it is necessary to constantly tighten the "iron fence" of the system. Since 2023, relevant departments have successively issued a series of rules and regulations related to financial supervision, such as the State Council's "Regulations on the Supervision and Administration of Non bank Payment Institutions", the State Administration for Financial Regulation's "Country Risk Management Measures for Banking and Financial Institutions", "Interim Measures for Regulatory Rating and Classification Supervision of Trust Companies", "Risk Prevention and Control Management Measures for Criminal Cases Involving Banking and Insurance Institutions", "Capital Management Measures for Commercial Banks", "Evaluation Measures for Systemically Important Insurance Companies", "Interim Measures for Supervision and Administration of Pension Insurance Companies", "Management Measures for Insurance Sales Behavior", "Risk Classification Measures for Financial Assets of Commercial Banks", "Management Measures for Consumer Finance Companies", and a series of regulations. The China Securities Regulatory Commission has publicly solicited opinions on the "Revised Draft of the Calculation Standards for Risk Control Indicators of Securities Companies". In addition, the Financial Stability Law was included in the first category of the legislative planning project of the 14th NPC Standing Committee in September 2023 to promote the financial supervision legislation to keep pace with the times, complement the system weaknesses, and eliminate regulatory gaps and blind spots.

The third is to focus on handling small and medium-sized financial institutions with risks and accelerate reform and restructuring. The number of small and medium-sized banks and other financial institutions accounts for more than 95% of the total number of financial institutions in China, showing an overall characteristic of "quantity is high and quality is weak". In recent years, some rural commercial banks and village banks in certain regions have encountered problems such as difficulty in withdrawing funds. According to the rating results of the People's Bank of China on banking financial institutions, in the second quarter of 2023, among the nearly 4000 commercial banks in China, there are more than 300 high-risk small and medium-sized banks [10]. In order to resolve the risks of small and medium-sized financial institutions as a whole, Pan Gongsheng, the governor of the People's Bank of China, pointed out in his report on the financial work of the State Council to the sixth meeting of the Standing Committee of the 14th National People's Congress that small and medium-sized banks should continue to be reformed into insurance, "one province, one policy" should speed up the reform of rural credit cooperatives, and steadily promote the reform, restructuring and risk resolution of rural banks. Simultaneously resolving the risks of high-risk small and medium-sized financial institutions in an orderly manner, promoting mergers and acquisitions, and ensuring the safe and stable liquidation of assets.

The fourth is to strictly enforce the law and increase the severity of punishment. Since 2023, under the general tone of strong supervision and strict regulation, financial regulatory authorities have taken action to address the chaos in the financial market, strictly enforced laws, and implemented more precise and effective supervision. Increasing the severity of punishment is a direct manifestation of the regulatory "long teeth with thorns". The State Administration for Financial Regulation uses the method of hierarchical cross inspection to enhance the effectiveness of on-site inspections and identify prominent risks in some small and medium-sized financial institutions. In 2023, the State Administration for Financial Regulation punished a total of 4750 banking and insurance institutions, punished 8552 responsible persons, and confiscated a total of 7.838 billion yuan [12]. Both the number of institutions punished and the amount confiscated have increased significantly compared to previous years. At the same time, in the securities field, the China Securities Regulatory Commission has intensified its crackdown on illegal activities such as financial fraud, fraudulent issuance, and market manipulation by listed companies. The number of investigations filed by listed companies in 2023 has increased by about 20% compared to 2022, and the punishment intensity and speed have significantly improved compared to the past.
2. Implement policies tailored to the city to support the reasonable financing needs of real estate companies

The real estate industry, as a pillar industry of the national economy, has a significant impact on economic growth, employment, fiscal revenue, and financial stability. Since the outbreak of debt crises in large real estate enterprises in 2021, debt problems have become a common issue facing the real estate industry. They not only have a serious impact on the normal operation and delivery work of real estate enterprises, but also the risk of debt defaults by real estate enterprises has spread to financial institutions and the upstream and downstream industries of real estate, causing an impact on people's livelihoods, employment, and social stability.

In response to the new situation in the real estate market and to prevent systemic risks caused by the real estate industry, at the macro policy level, the State Council has clearly required in a series of important documents that policies should be tailored to each city, focusing on improving expectations, expanding effective demand, supporting rigid and improved housing demand, while also urgently studying medium - and long-term fundamental solutions, eliminating the drawbacks of the "high debt, high leverage, and high turnover" development model over the years, and promoting a smooth transition of the real estate industry to a new development model. In the 2024 Government Work Report, it is further pointed out that measures should be taken according to the city to optimize real estate regulation, promote the reduction of housing loan costs, actively promote the work of guaranteeing the delivery of buildings, optimize real estate policies, and provide equal support to the reasonable financing needs of real estate enterprises of different ownerships, in order to promote the stable and healthy development of the real estate market. At the same time, governments at all levels provide policy and financing support for real estate enterprises through industry support policies such as the extension of the "Financial 16 Measures", financial support for the construction of affordable housing, the construction of public infrastructure for both flat and urgent use, the renovation of urban villages, the cancellation of land auction and price restrictions, and the "Three No Less Than" and "White List of Real Estate Enterprises". The resolution of the crisis in the real estate industry is more important than the recovery of the sales side. Therefore, since 2023, governments at all levels have further stimulated residents' demand for home purchases and stabilized the sales revenue of real estate enterprises through policies such as dynamic interest rate adjustment mechanisms, recognizing houses but not loans, and loosening local "four restrictions".