Non-Performing Loan Resolution in the Context of China’s Transitional Economy

The proportion of non-performing loans (NPLs) constitutes an objective measure of capital adequacy for individual banks and is one of the critical indicators of a country's economic efficiency. Beginning with the United States in the late 1980s, there has been a succession of non-performing loan crises in different countries around the world (Lindgren, Garcia, and Isaal 1996). While NPLs are found in every industry, real estate loans and other loans backed by real estate, have dominated the recovery efforts made by governments. Real estate assets often serve as collateral for the securitization of NPLs, and have been the focus of Wall Street in bringing capital to invest in NPL-backed securities.The purpose of this chapter is to examine the efforts undertaken by the Chinese government to resolve the non-performing loan problems the country has faced since the mid-1990s, and to analyze the associated impacts of this resolution process in the context of China's rapid urbanization and transitional economic reform. To better highlight some unique characteristics of the Chinese NPL resolution process and to draw implications for the China case, the NPL experiences of two other East Asian countries that also faced severe NPL problems in the 1990s — specifically, South Korea (henceforth, Korea) and Japan — will be summarized briefly