Doing business in China, even in the post-WTO era, is full of risks and uncertainties. This is especially true for new types of business that aim to reform years of inherited thinking. The famous saying coined by Deng Xiaoping, 'crossing the river by feeling the stones', aptly describes the process of pioneering such new forms of business. The participation by foreign investors in the purchase and disposition of non-performing loans and related distressed assets (NPLs) generated by the major Chinese state-owned commercial banks (SOCBs) is a good recent example of this process. The issue of NPLs generated by the major Chinese SOCBs was first addressed by the Chinese government in the 1990s, but concerns over the loss of state-owned assets prevented concrete steps from being taken and the SOCBs were not allowed to write off or sell debts at a discount. Eventually an intermediate solution was agreed upon and four asset management companies (AMCs) were established in 1999 to acquire a certain amount of NPLs from each of the four SOCBs. However, concerns about the loss of state-owned assets still held sway and when the transfer of NPLs to the AMCs took place in 2000 they were done at book value. This caused many international observers to conclude that the political will to perform radical surgery on the SOCBs was still lacking. The introduction of NPL auctions open to foreign investors, however, appears to indicate that the political will may have been found. The first such auction was launched by the Huarong Asset Management Corporation (Huarong), the AMC established to take over NPLs from the Industrial and Commercial Bank of China, in late 2001. However, the project is still awaiting Moftec approval. This has raised speculation as to when and in what form Moftec will approve the deal. But the mere fact that the auction was allowed to go forward with foreign investors bidding for state-owned assets on international commercial terms would appear to indicate that the government has at least in principle accepted the fact that the reform of the state-owned banking sector must involve accepting the major losses necessarily involved in the NPL issue. Issues Not surprisingly, various legal issues have arisen during the purchase and sales process. First, PRC law in relation to property rights, land use rights and mortgage rights is far from clear and well developed and this makes it difficult for potential investors to assess how the rights to be acquired will rank in relation to other competing rights, such as employee claims. This situation is further complicated by the irregularity of registration systems at different levels of government in different regions. Nor are these systems likely to be unified in the near future. A second issue is the uncertainty of the transaction structure. While Moftec has taken the lead in accepting applications for the of establishment Sino-foreign joint ventures to own NPLs, no approvals have yet been issued. At the same time, China Orient Asset Management Company (China Orient), another of the four AMCs, has sold certain NPLs directly to offshore entities on the strength of a State Council approval. However, it is unclear whether this precedent will become a practical option as in general it is more difficult to obtain approval from the State Council than from Moftec. In addition, without an onshore entity to manage the NPLs the only other current alternative would be to authorise the AMCs to manage the NPLs. This option, however, may not be satisfactory to many foreign investors. The third issue is the repatriation of proceeds from debt recovery. Proceeds from debt recovery do not really fall into any existing foreign exchange remittance schemes and therefore special approval will be needed from the State Administration of Foreign Exchange (SAFE). However, it is unclear as a regulatory matter how SAFE will treat the cash flow of recovery proceeds. As widely reported, China Orient has successfully remitted the first instalment of debt recovery proceeds to its foreign buyers, but it is unclear whether SAFE approval will be ensured if future deals occur without the blessing of the State Council. A final issue is who can manage or service the NPLs. In other Asian jurisdictions, such as South Korea and Thailand, the standard model has been to have an onshore servicing entity (separate from the offshore or onshore joint venture purchaser of the NPLs) wholly owned and managed by the foreign investor. However, no PRC authorities have yet indicated that they will approve such a structure. In general, the concept of a special purpose servicing vehicle is alien to PRC regulators and existing PRC regulations. Whether such a structure will eventually be approved remains to be seen. In the meantime, foreign investors will no doubt continue to be attracted to the potentially huge market in Chinese NPLs, and will continue to 'cross the river by feeling the stones'.