Foreign Investment in NPL Assets: Is China's Legal Environment Up to the Task?

By David D. Liu, Sidley Austin Brown & Wood, Shanghai

The PRC government has made tackling the NPL problem a very public and high profile task. State-owned Asset Management Companies (AMCs) were first set up in 1999 to absorb debts from the four state-owned commercial banks. Although foreign interest in NPL assets has garnered considerable media attention, to date actual investment in the NPL sector has not been very extensive.

On December 2 2002 Huarong Asset Management Company (Huarong)¹ announced that it had sold Rmb10.8 billion (about US$1.3 billion) in NPLs to a Morgan Stanley_led consortium, and Rmb1.972 billion in NPLs (about US$238 million) to a Goldman Sachs_led consortium. Huarong also announced that its applications for establishing two cooperative joint venture Asset Management Companies (CJV AMCs), one with a Morgan Stanley_led and the other with a Goldman Sachs_led consortium, to hold and dispose the NPL assets to be contributed/transferred to the respective CJV AMCs by Huarong and the Morgan Stanley/Goldman Sachs_led consortia² were approved by the Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce or MOC). According to Huarong, on November 26 2002 the parties to the CJV AMCs submitted their applications to the State Administration of Industry and Commerce (SAIC) for its issuance of a business licence. On March 13 2003, Morgan Stanley announced that the Morgan Stanley_led consortium received final regulatory approvals for the sale of Rmb10.8 billion NPL assets by Huarong to the Morgan Stanley_led consortium.