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.