A lot hangs on the sealed envelopes that were handed in to China Huarong Asset Management yesterday, as it seeks to dispose of 16.6 billion yuan (about HK$15.55 billion) of non-performing loans. This is the first auction to include foreign investors and will give the best indication of what the future holds for China's mountain of bad debt, estimated at more than US$155 billion. The big financial houses that have done well out of buying up the non-performing loans of Thailand, South Korea and Japan will be dipping a cautious toe into what Chinese officials tout as their 'treasure chest'. Six months earlier, Huarong staged a roadshow around Europe and the United States, offering potential investors information packs costing US$25,000. The information described a mixed basket of assets from 301 borrowers and 3,200 projects. Huarong was set up to handle the debts of the Industrial & Commercial Bank of China, and three other asset management companies have been set up to handle the bad debts of the other three big state banks. 'People are being very cautious. This is only just getting started,' said Tim Clissold, director of corporate finance and recovery at PricewaterhouseCoopers. The results of the bidding, to be announced in a month's time, will be a strong indicator of how the Chinese authorities will move forward on disposing of the rest of the problem. 'If the bids are lower than they expected, it will prompt a lot of soul searching. If deals are struck then other foreign investors will be watching closely on how the buyers get on,' Mr Clissold said. The official news agency Xinhua said three bidding teams consisting of seven overseas investors and domestic enterprises had submitted applications for tenders for five packages of Huarong non-performing loans before yesterday's deadline. The five asset packages have a book value of 15.6 billion yuan. For asset managers, a poor result will give them more weight in urging the government to press ahead with vital reforms. China lacks a working bankruptcy system with few auditors, courts and laws relating to insolvency. There are no secured creditors and it is nearly impossible to force a firm into receivership. 'What I don't understand is why a state bank cannot collect a loan from a state enterprise through a court. And surely, if the state cannot collect from itself, how could a foreign investor expect to collect the debt?' said William Gamble of consultants Emerging Market Strategies. Huarong has filed lawsuits against more than 100 enterprises involving about 107.3 billion yuan without much success. Until now, foreign companies that have taken over Chinese state-owned enterprises have found it difficult to sack staff, replace managers or bring in new equipment. Foreign executives have been taken hostage, physically threatened, and faced strikes and lockouts when they tried to assert their rights, even with the backing of court decisions. 'In my view, a non-performing loan from one of the four Chinese state banks is worthless. If the advisers to the Chinese Government are able to sell even a dollar of this junk, the Chinese are a dollar ahead,' Mr Gamble said. The auction will give a strong indication of how low the value of these assets must be cut in order to sell them to foreigners. Mr Clissold said: 'It could take a lot of political will for the Chinese to drop the price so that foreigners can make money out of these assets.' The Chinese side have talked about these assets as having a real value of 30 per cent of their face value but others rate them at 10 per cent or below. The lack of proper insolvency laws makes it hard to foreclose on the property, which may be the most valuable part of a bankrupt factory. The land remains in the ownership of the state and instead, investors can be left with vague and unenforceable land-use rights. Often what other saleable assets are listed have already been plundered by the management, making it difficult for new owners to realise their gains. Although investors in Huarong's sale of assets will be acquiring equity in functioning enterprises, they will have to struggle to gain enough control of the companies in order to turn them around. Many are thought to be 'vampire' companies, only kept alive by repeated injections of fresh capital from state banks or unwary investors.