11 omelveneny myers llp david pierce and lawrence yee

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Unformatted text preview: Yee, China's Bank Asset Management Companies, p.11, O'Melveneny & Myers LLP David Pierce and Lawrence Yee, China's Bank Asset Management Companies, p. 11, O'Melveneny & Myers LLP CHAPTER EIGHT: CONCLUSION NPLs are the cancer in the banking system. Initially, NPLs may not seem to have serious negative effects. Banks remain liquid, and depositors retain their confidence in the system. Over time, however, the size of the problem grows. Eventually, the efficiency of the banking system is comprehensively undermined, as the task of making new loans to productive enterprise takes second place to juggling a portfolio of bad loans with low collectibility. The fiscal cost of cleaning up the banking system can become so large as to be itself an obstacle to needed action. NPLs are essentially a product of the irrational allocation of resources. China has a NPL issue primarily resulting from a transitioning economy dominated by the triangular relations of stateowned enterprises (SOEs), state-owned commercial banks (SOBs) and the fiscal policy. Other causes include real estate bubbles in 1990s, underdeveloped credit culture and institutional infrastructure. It is not clear what the exact amount of China's NPLs is due to the lack of transparency in the banking sector. The estimated number is around 30% of total outstanding loans of SOBs in 1999. The number looks intimidating at the first glance, however, it is certain that the NPL problem in China will not lead to an immediate financial crisis as it is more a stock problem than a flow one. However, the huge amount of overhanging bad debts has become one of the bottlenecks for China's further reform, particularly, in the banking sector. The establishment of four Asset Management Companies (AMCs) was an innovative approach to provide an instant relief of the bad debt burden of SOBs, to recover distressed assets as well as to restructure SOEs. The AMCs have been continuously seeking new NPL workout approaches and made substantial progress. A series of workout approaches have been introduced including debtequity swap, discount payoff, loan pool sale and property auction. By 2001, including debtequity swap transactions, the AMCs have finished the workout of about 46% of the total NPLs they took on from SOBs. The process, however, will become increasingly difficult because the high quality assets have been disposed of first and the more troubled ones still remain in the portfolio. Furthermore, if the government cannot make a creditable commitment that the current NPL transfer and debt-equity swap is a once-off policy, new NPLs will be encouraged through soft lending by the SOBs and strategic default by the SOEs. There are also several obstacles ahead to the AMCs including China's immature capital market, AMCs' internal structural problems as well as China's weak legal enforcement mechanism. The AMCs would be able to accomplish their goal eventually with more workout approaches introduced and much improved skills. More important is that the Chinese government has learned lessons from its neighboring countries and made a great commitment to tackle the NPL problem not only from the surface but also from the fundamental structure, evidenced by its efforts to improve the corpor...
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This document was uploaded on 03/12/2014.

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