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China is the fastest growing country in the world. Moreover, its economy has already become one of the most important in the world. Many commentators predict that China will surpass the size of the U.S. economy some time in the second decade of this century (although it will, to be sure, still be at a much lower per capita income level). Though these predictions are for most purposes quite misleading,1 China’s prowess in manufacturing is already a challenge to the manufacturing sectors of the most advanced economies, at least in labor intensive industries. Moreover, China is going beyond low-wage manufacturing and entering the high technology arena (from the top down, so to speak) through high-level research backed by a growing army of highly educated scientists and engineers completing graduate studies and through the outsourcing to

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This Working Paper is brought to you for free and open access by the Coase-Sandor Institute for Law and Economics at Chicago Unbound. It has been accepted for inclusion in Coase-Sandor Working Paper Series in Law and Economics by an authorized administrator of Chicago Unbound. For more

Part of the Law Commons This Working Paper is brought to you for free and open access by the Coase-Sandor Institute for Law and Economics at Chicago Unbound. It has been accepted for inclusion in Coase-Sandor Working Paper Series in Law and Economics by an authorized administrator of Chicago Unbound. For more information, please contact

Modern economies are heavily dependent on the corporate form of doing business. The sheer scale of modern commercial activity, once it goes beyond the individual store and workshop, increasingly demands capital beyond the resources of most individual entrepreneurs. Although the capital needs could in some cases be met by partnership, the partnership form has proved rather inflexible and is utilized primarily for very small enterprises and for the professions. Some professional organizations using the partnership form—such as accounting and law firms—have taken advantage in the United States of various special statutory entity forms, such as limited liability partnerships and limited liability corporations, that grant limited liability but cannot be easily used as a source of large-scale capital from public investors.1 The use of companies to pool large sums of capital and therefore to raise capital for large new commercial ventures has been increasingly common since the Dutch and English East India companies were organized at the beginning of the seventeenth century.2 By the twentieth century corporations became the dominant organizational

Credit markets are just as important as equity markets to financial development. And in most countries far more finance is generated in credit markets than in public equity markets. Even in the United States, which is usually thought the country with the most pronounced equity culture, far more money is raised in credit markets than in equity markets. The Role of Banks The central institution for large-scale lending, the bank, is therefore the point of departure for any analysis of financial development for developing countries. It is true that some developing countries have corporate debt markets, especially the more developed of those countries, but even the countries of Southeast Asia that have been successful in developing stock markets are still at the early stage of developing corporate debt markets.1 Hence, the focus of the first part of this chapter will be on banks. The discussion will turn to special problems that creditors—not just banks but all creditors— face when the borrower cannot pay or fails to pay. The core of the legal issues turns on creditors rights law and bankruptcy law.