ABSTRACT
This chapter provides a correct diagnosis of the non-performing loan (NPL) piling up in Chinas banking sector in the late 1990s. The late 1990s also witnessed governments bolstered efforts to restructure the state-owned enterprises (SOEs). The chapter focuses on the part of the banks lending that was least distorted by government-orchestrated policy lending. It reviews whether the asymmetric risk-taking as regarding clients ownership status has changed over time with the progress of Chinas banking reforms and SOE reforms. Banks lending supports to the hypothesis of moral-hazard behavior. It observes that the estimated coefficient for SOE dummy projected default probability (PDP) statistically significant at 1", while that for SOE dummy squared PDP not statistically significant. The aggravation of the banks lending bias and asymmetric risk-taking in favor of SOEs in the later years of the 1990s could best be explained by the hypothesis of rational lending inspired by possible future ex post bailout plans.
