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NPLs: China’s trillion renminbi problem

Non-performing loans will haunt the People’s Republic in 2009.

The global financial crisis might exacerbate an Rmb1 trillion ($540 billion) problem that China will have to deal with next year. That is the approximate total of the non-performing loan portfolios held by the four state-backed asset management companies set up in 1999 to hive off bad assets from the big four Chinese banks. The four firms, Cinda, Huarong, China Orient and Great Wall, were created to take on the non-performing loans of banks and are due to wind up by the end of 2009.

Now the Chinese authorities are contemplating how to digest the NPLs held by these four companies that have not been resolved, at a time when the banking system faces a new wave of bad loans.

The four companies are funded by borrowing from the People’s Bank of China and by issuing bonds that pay 2.25%.

What options are open to China once that deadline approaches? The government could simply set up a new vehicle for the bad loans held by the four asset management companies and postpone dealing with the problem. It could also require the People’s Bank of China to digest the problem, perhaps aided by the commercial banks, which will have to give up hopes of recovering the money they invested in the four companies’ bonds.

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