ABSTRACT
The aim of this research note is to provide a correct diagnosis of the non-performing-
loan (NPL) piling up in China’s banking sector in the late 1990s. The scale of this
piling up was unprecedented. With NPL-ratio officially amounting to over one-
fourth of bank loans, the four major state banks, namely the Bank of China (BOC),
the Agricultural Bank of China (ABC), the China Construction Bank (CCB), and
the Industrial and Commercial Bank of China (ICBC), became technically insolvent
[Xu (1998) and Lardy (1998)]. The severity of the issue prompted the government
to the Ministry of Finance issued bank restructuring bonds worth RMB 270 billion
(US$ 33 billion) to re-capitalize the four state commercial banks by doubling their
capital base in 1998. A year later, the government established four state-sponsored
asset management companies to take over RMB 1.4 trillion (US$ 169 billion) of
bad debts from the banks’ balance sheets.3 Despite these rescue efforts, by 2003 the
NPL’s of these four banks still amounted to RMB 2.4 trillion (US$ 290 billion), or
The timing of the NPL piling up coincided with major strides in banking reforms.
The promulgation of a central bank law and a commercial bank law in 1995 marked
a watershed between a centrally planned mono-bank system and a post-reform
