The Bank of China (BOC), one of China's four main state banks, is planning a direct public auction of its non-performing loans (NPLs).
Previously, asset management corporations (AMCs) specifically created to dispose of NPLs transferred from a large state bank to an AMC (State AMCs) held such auctions. If approved, BOC's planned direct sale to investors would provide additional solutions to certain NPL investment issues.
Beginning in October 2001, China began building a legal framework for NPL disposal by issuing provisions governing the use of foreign capital by AMCs in asset restructuring and disposal (the NPL provisions). The NPL provisions provided guidance on issues such as the type of assets that an AMC could restructure and methods by which an AMC could dispose of its newly acquired assets.
But the NPL provisions only offered limited guidance. Foreign investors purchasing NPLs still faced a number of difficult issues, such as the fact that PRC law neither allows foreign investors to convert renminbi revenues earned from NPL dispositions into foreign currency nor addresses foreign debt registration in the NPL context, where debt packaged in an NPL portfolio involves numerous debtors.
These difficult issues have proven to be best solved by special administrative approvals. In March 2003, for example, Morgan Stanley led an investment group that received approvals in connection with its December 2002 purchase of NPLs. These approvals practically solved the foreign exchange and debt registration issues discussed previously.
Approvals may once again serve to solve other issues, such as BOC's disposition of debts at below net book value, currently prohibited pursuant to PRC law.
Simon Luk and Richard Yee