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Document Type

Case Study

Abstract

Chinese financial authorities began to liberalize their economy in the 1970s, though it would take two more decades to realize a solution to the massive non-performing loan (NPL) problem faced by state-owned commercial banks (SOCBs). In order to remove and dispose of bad assets left over from the policy-lending era of the former command economy, the State Council created four public asset management corporations (AMCs) between April and October of 1999. The AMCs, under the administration of the Ministry of Finance, were responsible for the acquisition, management, and disposal of NPLs from their assigned state-owned commercial bank. In addition to maximizing returns on the recovery of assets offloaded by the SOCBs, the AMCs were mandated to assist in the restructuring of state-owned enterprises (SOEs) by facilitating debt-to-equity swap agreements. The government provided funding for NPL purchases in the form of an initial equity capital injection of RMB 40 billion (provided by the Ministry of Finance [MoF] and split equally among the four AMCs), credit from the People’s Bank of China (PBoC), and special AMC bonds held by the big four state-owned commercial banks. In total, RMB 1.4 trillion (1 USD = RMB 8.3 in 1999) in NPLs were acquired by the four AMCs over the course of 1999 and 2000. After having transferred approximately RMB 136.3 billion (USD 16.9 billion) to the MoF and PBoC, the AMCs ceased NPL operations by the end of December 2006. They have since been restructured to operate as nonbank financial institutions.

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