Buying up chunks of state-owned assets is sticky business on the mainland. Foreign banks found that out a decade ago when several tried to invest in a 1.4 trillion yuan wave of bad debt that was shifted from its four biggest banks onto the balance sheets of newly created, state-controlled asset management companies. The vast majority of the spoiled loans back then were streaming straight from state firms and the marketplace for restructuring and disposals was led firmly by a central government hand. A new wave of deteriorating loans is swelling in the wake of the mainland's 4 trillion yuan (HK$5 trillion) stimulus package launched in late 2008. As mainland banks report increasingly higher non-performing loans (NPLs) towards the end of the year, foreign investors are questioning whether a new bankruptcy law and a higher quality of assets this time around will make the mainland bad debt market more palpable - and digestible. "The first time, there were a lot of legacy policy loans and foreign investors were very cautious," said Howard Lam, a Hong Kong-based partner at Latham and Watkins, who participated in the debt auctions 10 years ago. Policy loans are government-directed lending, usually to state companies. In the mainland's case, such loans are used to prop up employment and economic growth often without consideration for whether the firms can ever service the debt. The fear at the time was that foreign investors would not be allowed to restructure or liquidate assets so closely tied to the mainland's social stability. Progress has been made on the legal front, especially with the passage of a bankruptcy law in 2007. However, the effectiveness of the new law, the cornerstone of the restructuring process, is far from reaching international standards. In a report last week, Fitch called the law "an embryonic piece of legislation lacking practical details, transparency, and consistency". Local governments still played a strong role in the restructuring of companies under their jurisdiction, Fitch said, and maintaining employment and social stability might take precedence over the honouring of creditors' rights. Another challenge for foreign investors a decade ago was the market itself. Starting in 2003, the government told its central asset managers to begin turning profits instead of just maximising recoveries on bad debt, according to Jack Rodman, president at Global Distressed Solutions and former adviser to state banks and asset managers doing the debt deals. The asset managers set "reserve" prices on bad debt portfolios that were higher than what they originally paid for the debt and would only sell to foreign investors after their bid reached that price, Rodman said. The government controls on pricing in the market sent investors scattering to Europe. "This was a command economy," said Benjamin Fanger, managing director and founder of Guangzhou-based Shoreline Capital, which first invested in mainland bad debt in 2004. "Now it's clear the government wants a market for NPLs. Banks are taking losses themselves and the government is encouraging that." Official figures put the NPL ratio for the mainland banking sector at 1.16 per cent in the third quarter with about 766 billion yuan in total bad debt, up about 45 per cent from the same quarter last year. Fanger says this year is likely to see a total principal balance of 200 billion yuan in NPLs reaching the market, about twice what the mainland's biggest banks transferred last year and four times what was transferred in 2012.