The most optimistic method to dispose of the loans would be to sell them. Alternatively, AMCs and banks have tried to either sell the underlying collateral or even the stock that they received in exchange for debt. Recent attempts to auction off assets have not been very successful. On June 3, 2002, a state bank kicked off an “auction week” of its bad assets in 60 cities. It tried to auction off RMB 3.3 billion in assets (US$402 million), but the auctions only yielded RMB 305 million (US$37 million).

Since foreign investors will almost always invest in anything Chinese, they were selected as the potential buyers for the NPLs. The Chinese put together a roadshow, where a portfolio of RMB 1.4 trillion (US$169 million) was presented to 200 institutional investors; 16 expressed interest and just seven bid. Only one “bid” was accepted. In December 2001, it was trumpeted that Morgan Stanley, a US investment bank, purchased some of the NPLs for nine percent of face value. The reality was different, as the structure of the deal became apparent a year later. A consortium led by Morgan Stanley and another led by Goldman Sachs had agreed with two AMCs to form joint ventures, which were to “focus on tackling their bad assets through sales, agreements with debtors, and auctions.” There was no mention of any sale, payment to the AMCs or transfer of title. Morgan Stanley and Goldman Sachs own 70 percent and 65 percent of the joint ventures respectively. The US companies have only a contingent interest in anything they can collect.

The expected recovery is 20 percent. The consortiums might look at a little history and pay more attention to the legal infrastructure surrounding their investments. For example, after three years, the recovery from the infamous collapse of Guangdong International Trust and Investment Corporation has been only 2.3 percent.

In January, the PBOC met in Beijing to try to find a way to re-organize the banks and reduce the NPLs. Solutions include another huge recapitalization, transferring another large tranche of NPLs to the AMCs, splitting up the banks, and selling their stock to foreigners. Subjecting the power of the communist government to law was not mentioned. The new governor of the PBOC said, “Dealing with this problem needs new thinking.” Apparently, none was available.