The Use of CDO Structuring for the Disposal of Non-Performing Loans in China

Abstract

This paper briefly introduces the problem of non-performing loans in China. It traces their origin within the history of the Chinese banking system and attempts to quantify the scope of the problem. An analysis of recent efforts to address non-performing loans is presented, with particular focus on the creation of the four Asset Management Companies. The author presents an optimal solution for the disposal of non-performing loans and explains the mechanics. That solution employs collateralized debt obligation structuring and offshore issuance of asset-backed securities. Finally, the paper introduces a hypothetical inaugural Chinese non-performing loan collateralized debt obligation (NPL CDO), with an analysis of the expected structure and detailed economics of such a transaction.