Hong Kong H-Share Liquidation Raises Difficult Issues

by Mary Swire, Tax-News.com, Hong Kong

28 January 2002

News of possible liquidation sent H share Northeast Electrical Transmission & Transformation Machinery Manufacturing's shares tumbling on Hong Kong's stock market yesterday.

The H-share market is used by mainland companies to raise capital in the SAR, and none of the 1,000 or so H-share companies has faced bankruptcy since Hong Kong returned to Chinese control in 1997. This is not so much because they are all healthy - many are not - but because they are mostly controlled by Chinese state organisations or by municipalities, who are keen not to besmirch their reputation in Hong Kong.

In the case of Northeast Electrical, however, the company's ultimate parent, the Shenyang city government, has announced that it will not bail out the company, leading to yesterday's precipitate 26% fall in the company's value.

A group of the company's creditors owed $43m under an overdue loan has applied for a liquidation order against it. The case will be heard on March 20, and will present the mainland with a tough decision - if it allows liquidation, that will be healthy for the transparency of the stock market, but may bring on a rash of similar actions, and will raise complex issues of jurisdiction which have not been tested in the 'one country - two systems' regime set up in 1997. On the other hand, if the mainland over-rules the SAR court, that will bring on uncomfortable questions about the reality of Hong Kong's financial independence.

It is also uncertain, to put it mildly, how a ruling by a Hong Kong court could be enforced by court-appointed liquidators if a company's assets are in mainland China. No-one supposes that Hong Kong bailiffs would be able to take walking possession of, say, a power plant in Shenyang.

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