China's Nonperforming Loans: A $540 Billion Problem Unsolved

22 Pages Posted: 4 Oct 2008 Last revised: 3 Mar 2009

Date Written: October 3, 2008


China's banking industry has grown rapidly over the past three decades. As the major source of funding for Chinese enterprises (especially state-owned enterprises), the banking sector has helped finance the nation's transformation from a centrally planned economy to a market-oriented economy. In the meantime, large amounts of nonperforming loans have accumulated on the balance sheets of Chinese banks, partly due to the cost of reform, partly due to poor management and inadequate regulation. In 1999, four asset management corporations were established to resolve the nonperforming loan problem. As stated in their charters, these asset management corporations would cease operation by the end of 2009. It is therefore of interest to examine the progress they have made in disposing of nonperforming loans. In this paper, the author attempts to draw a picture of how the nonperforming loan problem has developed since mid-1990s, provide an estimate of the total nonperforming loans held by Chinese financial institutions, and assess to what extent these bad assets might pose a threat to the country's financial stability.

Keywords: China, Bank regulation, asset management corporations, nonperforming loans, NPL

JEL Classification: G18, G21, O16

Suggested Citation

Li, Tong, China's Nonperforming Loans: A $540 Billion Problem Unsolved (October 3, 2008). Available at SSRN: or

Tong Li (Contact Author)

Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
United States
310-570-4655 (Phone)
310-570-4625 (Fax)

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