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51894913 - AN EXAMINATION OF CHINA'S NON-PERFORMING LOAN...

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AN EXAMINATION OF CHINA'S NON-PERFORMING LOAN ISSUE By Xiaojun Allan Wu B.A. English and Diplomacy Foreign Affairs College, China, 1996 Master in Professional Accounting University of Texas at Austin, 1999 Submitted to the Department of Architecture In Partial Fulfillment of the Requirement for the Degree of Master of Science in Real Estate Development at the Massachusetts Institute of Technology September 2002 @ 2002 Xiaojun Allan Wu. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author: Department of Architecture August 2, 2002 ) I Certified by: Edward S. Steinfeld Assistant Professor, Political Science Thesis Advisor Accepted by: MASSACHUSETTS iNSTIT UTE OF TECHNOLOGY SEP 2 02002 LIBRARIES William C. Wheaton Chairman Interdepartmental Program in Real Estate Development
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AN EXAMINATION OF CHINA'S NON-PERFORMING LOAN ISSUE By Xiaojun Allan Wu Submitted to the Department of Architecture on August 2, 2002 In Partial Fulfillment of the Requirement for the Degree of Master of Science in Real Estate Development Abstract Non-performing loans (NPLs) are essentially a product of the irrational allocation of resources. Different from other Asian countries, China's NPL issue resulted primarily from a transitioning economy dominated by the triangular relations of state-owned enterprises (SOEs), state-owned commercial banks (SOBs) and the fiscal system. Even though the total amount of NPLs in 1999 was estimated to be around 30% of the total outstanding loans of SOBs, the NPL problem in China would not lead to an immediate financial crisis as the NPL problem 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 and to restructure SOEs. Despite facing many challenges, the AMCs have been continuously seeking new NPL workout approaches and made substantial progress. A series of workout approaches have been introduced including debt-equity swap, discounted payoff, loan pool sale and property auction, etc. 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, the AMCs' internal structural problems as well as China's weak legal enforcement mechanism. Fortunately, the Chinese government has made a great commitment to tackle the NPL issue not only from
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