Foreign Participation In The Disposal Of Non-performing Assets In China Legal Issues

It is reported that at present China has almost successfully disposed, through the four state-owned Asset Management Companies (hereinafter referred to as "AMCs"), the Non-performing Loans (hereinafter referred to as "NPL") which have been created by the four State-owned Banks (hereinafter referred to as "SOBs") up to1999. As of late 2006, the four AMCs have disposed the NPL amounting to RMB 12102.82 hundred million in total at policy level and have reclaimed RMB 2110 hundred million in cash according to the official statistics. Therefore, reviewing the nearly 7 years' reform and development when the AMCs are about to move on towards a new era, the AMCs have generally developed through 3 stages: disposition totally by domestic funds, initial involvement of foreign capital and the latest stage in which foreign capital plays a more important role concerning the NPL disposition. During this period, media and academic circle have commented on the effect of the foreign capital's involvement from different points of view. Generally, they considered that the foreign investors are quite interested in China's NPL and their involvement can significantly solve the problem lack of funds in China. However, the targets of the foreign capital as well as the final whither of the state-owned assets are also deeply questioned by some media. This paper tries not only to conclude the current situation of the NPL and the tendency of the foreign capital by collecting and analyzing the diverse statistics as well as reviewing the course of the foreign capital's involvement, but also to analyze the interest of the foreign investor to China's NPL market and indicate the importance and significance of such involvement. Furthermore, based on the aforesaid analysis, the author tries to explore and practically analyze the relevant legal issues with respect to the involvement of foreign capital in China's NPL disposition. This paper consists of four parts and amounts to nearly 40 thousand words.The first part is concerning the previous situation of China's NPL and the ongoing process of the disposition. This part introduces the historical causes and background of the NPL, the reasons of AMCs' establishment and the present situation of the NPL disposition. What's more, the author also points out the establishment of the AMCs is required by the internal financial reform as well as the open and promise to the world.The second part deals with the current situation of the foreign capital's involvement in China's NPL disposition. This part consists of four sections as follows: 1st, review of the experience of the foreign capital's involvement and list the main typical cases in the past seven years; 2nd, introduction of the scope and methods allowable to the foreign investors as for the NPL based on the 1st section; 3rd, analysis of the interest of the foreign investors; 4th, importance and significance of the foreign capital's involvement in China's NPL disposition. Here this part comes into a conclusion that the involvement of the foreign capital in NPL disposition should be encouraged other than blindly criticized and questioned. What we need to do is to properly guide the flow of the foreign capital, improve our invest environment as well as the legislation which will be elaborated in the next part.The third part, the main part of this paper, focuses on the legal issues concerning the foreign capital's involvement in China's NPL disposition. The author explores ten relevant legal issues classified into two categories which can be respectively called problems at the macro level and problems at the technical level. At macro level, the three problems are raised as follows: 1st, the establishment and perfection of the China's NPL market; 2nd, the access limitation to the NPL market for foreign investors; 3rd, the transparency of the AMC and the trade operation still need improving. At technically level, there are seven problems summed up here as the following: the application of law; the feasibility of creditor's right used for capital contribution; transformation of the domestic liabilities to foreign liabilities as well as the problem of foreign security; the administration and ruling of foreign exchange; taxes and fees preference; the nature of the AMCs which are partially invested by foreign capital and the securitization problem.The last part is the conclusion presenting five suggestions on the basis of the above analysis and elaboration. It is concluded that since the foreign investors' interest in NPL disposition declines while China is in a shortage of funds to dispose the NPL, in such background taking advantage of the foreign capital is extremely necessary and essential for China' NPL disposition as the second part discussed. Moreover, as the involvement of foreign capital in NPL disposition is stepping into the third stage, China has to adopt proper measures and policies for this special stage, such as to adjustment of the industrial structure, perfect the capital market, break the monopoly of the NPL market, pay more attention to the legislation, improve the supervising system and means, etc. To sum up, solving the ten legal problems raised in the third part can exert a positive influence on the China's NPL disposition.