Cover Story: China Rewrites the Rules of Financial Failure

The collapse of China Huishan Dairy Holdings Co. Ltd. in 2017 not only marked the downfall of a prominent milk brand but also exposed significant weaknesses in China's ability to handle large-scale corporate failures. Huishan's shares fell 90% in a day, adversely impacting creditors, employees, and suppliers, especially in northeast China. The root cause was a web of debt and fraud, with Muddy Waters’ accusations of alfalfa business fabrication later confirmed. The collapse resulted in China’s largest ever bankruptcy consolidation, with 83 linked companies, 8,000 employees, and over 30 billion yuan ($4.2 billion) in liabilities. In 2020, the Shenyang Intermediate Court pioneered combining all affiliates into one restructuring plan, a move inspired by U.S. bankruptcy practice and a first for China, filling gaps in its 2007 bankruptcy law. Five years on, this approach is being codified, as China’s legislature began a major overhaul of bankruptcy law in September 2025 to better manage market exits and economic risks as case volumes consistently top 20,000 annually. Policymakers recognize that existing frameworks still lag behind economic realities and need substantial strengthening to avoid financial and social turmoil when large firms fail. [para. 1][para. 2][para. 3][para. 4][para. 5][para. 6][para. 7][para. 8][para. 9][para. 10][para. 11]

A key revision centers on formalizing the government’s role in bankruptcy. The new draft law mandates “bankruptcy coordination mechanisms,” requiring each county-level government to create a dedicated body for managing bankruptcies. Measures include introducing “public administrators”—government departments, or nominated staff—to handle bankruptcies with no assets and providing local guarantee funds for these cases. The reform recalibrates state power, balancing roles between courts and government and drawing inspiration from systems like the U.K.’s Insolvency Service. Coordination—rather than interference—between government and judiciary has become routine across China, but experts urge careful boundary-setting, emphasizing that true systemic reform comes only as accompanying laws delineate institutional responsibilities. Some legislators propose tighter rules on guarantee fund use and clearer division of responsibilities between national and local authorities.[para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26][para. 27]

The revised law also targets abuses of bankruptcy, aiming to curb “fake bankruptcies” where court protection is misused to evade debts. It strengthens avoidance rights, expanding the types of transactions administrators can unwind before bankruptcy and extending the look-back period to two years for relatives or affiliates. These stricter rules could hinder some financing practices but are seen as needed to close loopholes. Penalties for non-cooperation or fraud are heightened, and explicit disclosure and transparency rules are introduced for the first time, with calls for even stronger standards and penalties for misinformation. [para. 28][para. 29][para. 30][para. 31][para. 32][para. 33][para. 34][para. 35][para. 36][para. 37][para. 38][para. 39]

Despite the promise of “reorganization” in the 2007 law, the reality until now was that only a small fraction—less than 5%—of cases ended in restructuring. Most resulted in liquidation, leaving behind inactive “zombie” firms. The new draft law seeks to make rescues more practical by simplifying creditor classification, clarifying administrator duties, streamlining equity transfers, and, crucially, treating forgiven debt as non-taxable income to reduce barriers to restructuring. Pre-filing negotiations are encouraged, inspired by global best practices, aiming to expedite in-court approvals and make reorganization more appealing and efficient.[para. 40][para. 41][para. 42][para. 43][para. 44][para. 45][para. 46][para. 47][para. 48][para. 49][para. 50]

For individuals, the law introduces a limited debt-clearance framework, allowing natural-person shareholders who guaranteed corporate debt to apply for relief alongside their company's bankruptcy, with restrictions designed to prevent abuse. Although falling short of a comprehensive personal bankruptcy regime, this marks a historic first step, with calls to further broaden eligibility. [para. 51][para. 52][para. 53][para. 54][para. 55][para. 56][para. 57][para. 58][para. 59]

Specialized provisions are being added for small businesses (with streamlined procedures), financial institutions (emergency mechanisms for banks and insurers), and cross-border bankruptcies (clarifying international recognition and cooperation), making the law more adaptive to China’s complex and increasingly global economy. [para. 60][para. 61][para. 62][para. 63][para. 64][para. 65][para. 66][para. 67][para. 68][para. 69]