Bargaining in the shadow of law and finance: the market-oriented debt to equity swap in China

Abstract

ABSTRACT This article presents a comprehensive review of China's recent market-oriented Debt-to-Equity Swap (DES) programme, a strategy developed to alleviate financial distress in companies and reduce the country's overall debt. The effectiveness of the programme in China remains a subject of debate, with particular concerns about government interference. This study uncovers that, while China's DES transactions show signs of becoming more 'market-oriented', the evolution is hindered by the current legal and financial institutions. The findings of this study reinforce the 'law and finance' theory, emphasising the crucial function of sound legal systems in enabling private bargains and promoting financial development and economic growth. To facilitate truly market-oriented DES and efficient corporate restructuring, the study underscores the need for China to foster reforms in legal and financial institutions. Key recommendations include promoting fairness in formal reorganisation, developing a separate restructuring framework, and exploring effective valuation methods.