China and the U.S. are worlds apart in many ways. But in an alternate universe of failed stars orbiting around a planet called bankruptcy court, they have come much closer.

China and the U.S. are worlds apart in many ways. But in an alternate universe of failed stars orbiting around a planet called bankruptcy court, they have come much closer. 2

China and the U.S. are worlds apart in many ways. But in an alternate universe of failed stars orbiting around a planet called bankruptcy court, they have come much closer.

Such is the big bang effect of the country’s first national bankruptcy law, which took effect June 1. The new law gives China a version of America’s Chapter 11, a legal process that allows insolvent companies to stay in business under court supervision while attempting to reorganize and pay creditors.

The new law also entitles foreign owners and creditors for the first time in modern Chinese history to assert rights to assets they own in China. It also provides a legal framework for foreign investors to pursue claims in an orderly fashion when businesses fail, long a missing jigsaw piece in the three decades since China opened itself up to foreign investment.

“It is an announcement to the world that global commerce can be conducted in China and China is part of the global economy,” said Thomas Lauria, chairman of the global financial restructuring and insolvency group at New York-based law firm White & Case. “It’s a clear statement that the Great Wall is down.” Lauria traveled to Hong Kong last week to brief a group of investment banking clients on the new law.

The high level of sophistication of the new bankruptcy law displays Beijing’s determination to build a sound legal system.

“It’s a far more sophisticated law than the insolvency law in Hong Kong,” said Alan Gover, a partner with White & Case. “H.K. actually has a very primitive law. It does not have the legal basis for insolvency.”

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