Foreign Investment in Non-performing Loans in China

By Yi Zhou

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Since the 1990s, especially after the Asian financial crisis, the disposal of Non-Performing Loans (NPLs) has been a primary concern for the People's Republic of China (PRC). China's state-owned commercial banks have been the mainstay of the state's financial system and have played an important role in economic development primarily as channels for raising and allocating capital. Prior to the promulgation of the PRC Commercial Banking Law in 1995, state-owned banks operated as organizations specialized in heavily policy-oriented credit business. Factors such as the overheated economy of the early 1990s, the transition to a market- oriented economy, and the absence of effective internal management systems to control loan quality all combined to create a sizeable volume of NPLs. Prior to 1993, the Chinese state-owned banks had not allowed for bad debt provisions and had never written off bad debts, which resulted in a constant accumulation of NPLs and, in turn, financial risks.