On Apr 29, 2005, “Circular on Strengthening the Management of Examining and Approving the Disposal of the Bad Assets in Foreign Investment” (hereinafter ‘Circular’) was issued by the Ministry of Commerce to provinces, municipalities directly under the Central Government, cities directly under State planning, Xinjiang Production and Construction Corps of CPLA, State-level Economic and Technical Development zones. In the ‘Circular’, the Ministry of Commerce makes further rules on the foreign investment’s rule in participation in the disposal of bad assets:

Firstly, strengthening the supervision further on the foreign investment’s participation in the disposal of bad assets. The ‘circular’ indicates that in order to accelerate the disposal of bad assets of state-owned bank and financial asset management companies, reduce the losses of state-owned assets, on 2001, after the approval of State Department, the financial asset companies were allowed to absorb foreign investment to participate in the assets reorganization and disposal after the approval, transfer the bad assets held, such as shares, creditor’s right to foreign investors, or establish foreign-funded enterprise to engage in some activities of disposal of bad assets, such asdebts reorganization, pursuit of creditor’s rights. By reason that such kind of investment methods makes a feature of strong policy-related, high degree sensitivity, wide range subjects, they shall be examined and approved strictly. The establishment of such foreign-funded enterprise shall be submitted to the Ministry of Commerce, and all-levels’ local authorities in charge of commerce and State-level economic and technical development zones shall not approve the establishment of such enterprise with their discretions. The Ministry of Commerce stipulates the strict examination and approval for the foreign investment’s participation in the disposal of bad assets explicitly, that is, as of the day of the Circular taking effect, such kind of investment methods have to be submitted to the Ministry of Commerce.

Secondly, to emphasize the “Circular on Banning Various Debt or Loan Collecting Companies and Striking Out Unlawful Debt-collecting Activities” issued on 2000 by State Economic & Trade Commission of PR China, Ministry of public security, State General Administration for Industry and Commerce, it points out that all-levels’ local authorities in charge of commerce and State-level economical and technical development zones shall execute the circular strictly and are forbidden to approve foreign-invested debt collecting companies and disguised debt collecting companies.

Thirdly, the ‘circular’ provides definitely: when the foreign investor invests in enterprises, they shall make written promises, namely, not being engage in the disposal of bad assets, such as debt reorganization, pursuit of creditor’s rights etc. Once it is found out that some enterprises engage in the disposal of bad asset, pursuit of creditor’s right, such circumstances shall be reported to the Ministry of Commerce promptly, for those which do not make correction in time in the light of the relevant requirements, they shall be punished in accordance with relevant laws and regulations.

Hereby, in the author’s opinion, the aim of the issuance of the ‘Circular’ is: 1. to prevent the losses of state-owned assets, 2. to prevent the foreign investment from speculating in the bad assets, 3 to restrict foreign investors collect immoderate financial information when they deal with the bad assets.

The author considers that the main purpose of government’s permitting the foreign investment to participate in the disposal of bad assets is to revitalize the bad assets by absorbing foreign fund, introduce advanced management experience, capital and technology so as to carry on the technical reform to the enterprise, improve the innovation of state-owned enterprise and the construction of modern enterprise system. However, in practice, that was not the case, foreign-invested financial institution in general purchase the bad assets with a much lower price, 6%-8% of the assets, when they obtain the item, they will not increase the investment to advance the total recovery value of bad assets, but rather subcontracting the domestic companies, the profits from the subcontract will be beyond 100%. Therefore, such conducts breach the original purpose of the government, and do little to the construction of disposal market of bad assets in China. Instead, foreign investors acquire tremendous profits and domestic bank information in this course.

To sum up, the issue of the ‘Circular’ demonstrate that the government has commenced to take measures to prevent foreign investment from participating in the trading in the course of disposal of the bad assets. On the basis of encouraging foreign investment to participate in the disposal of bad assets to improve the innovation and development of our country’s bank, the ‘Circular’ will goes further to work with “Ministry of Foreign Trade and Economic Cooperation, Ministry of Finance and People's Bank of China, Absorption of Foreign Capital by Financial Asset Management Companies to Participate in Asset Restructuring and Disposal Tentative Provisions” mutually, to prevent the foreign investment’s speculation in the bad assets and subsequently make them help Chinese bank industry to accelerate the innovation.

── Michael Hu