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Macroeconomics Case Study

Case Title:

Non Performing Loans in Chinese Banking Sector: Unsolved and Unsustainable

Publication Year : 2010

Authors: S Ray and P Krishnan Ray

Industry: Banking, Insurance and Financial Services


Case Code: MAC0027IRC

Teaching Note: Not Available

Structured Assignment: Not Available

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Since inception, the four specialised banks (commonly known as the Big Four) in China, took up the aggressive lending policies and mandatory directive lending provisions on the government-owned projects. This policy, however, took a major set back in 1992, when the banks recorded high non-performing loan (NPL) accumulation in these local banks. This problem was further aggravated after the occurrence of the Asian Financial Crisis in 1997. Finally, China's accession to the WTO (world trade organisation) in 2001 opened up the economy to foreign operators, which was viewed as a major threat for the local banks. Continuous cash infusion to these banks by the governments had proved to be a temporary measure for solving this high NPL problem. But the root of the complication was never adhered to. The Big Four was required to overcome the bad asset problem in order to maintain their sustenance in the Chinese market. Moreover, the Chinese banks were going for international operations by establishing their operational divisions abroad. But, their growth over the weak foundation of high NPL accumulation might turn out to be a concern for them in the future.

Pedagogical Objectives:

  • To a study on the transformation that took place through a series of reform phases in the Chinese banks.
  • To analyse the credit-risk policies of the Chinese banking sector and the methods adapted to manage the NPLs.
  • To have an idea of the Chinese banking sector and its convergence to Basel II.

Keywords :  China, Banks, World Trade Organisation (WTO), Non-performing loan (NPL), Reform, Asset management companies (AMCs), Basel II, Credit risk management, Credit evaluation, Profitability analysis, China Banking Regulatory Commission (CBRC), Five-tier loan classification, General Agreement on Tariffs and trade (GATT), State Administration of Foreign Exchange (SAFE), Asian Financial Crisis 1997

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