IntroductionChina's ambitious efforts to reform and restructure the banking system began in earnest in 1998 and are accelerating rapidly as the accession to the World Trade Organization (WTO) become true. This pace reflects the industry transformation that WTO membership promises as restrictions are removed and China's banks are subjected to greater competition from foreign institutions with developed skills and capabilities, advanced information technology, efficient processing and superior management expertise with market economies. According to an industry source, the lending business in China is expected to grow by 40% annually in the decade after entry into the WTO. This tremendous potential and ensuing competition represents the opportunity and challenges the domestic banks face. Facing challenge, China's banking industry must be recognize that managing inherited nonperforming loans (NPLs) and overcoming antiquated business models, policies, procedures, systems and infrastructure are critical to meeting the demands of an increasingly competitive market. This submission accounts on the most popular weakness that exists in the bank industry and offer a systematic recommendations to improve it .1.0 The weakness of Chinese banks1.1 Non-performing loans, weak capital base and low profitabilityNPLs are recognized as one of the most serious balance-sheet problems facing Chinese banks in recent years, yet the exact figure of total NPLs in China's banking sector is still unknown. In 1999,the authorities proposed a solution of debt-to-equity swap to deal with this issue, i.e., to establish asset management companies (AMCs)to take over the existing NPLs of four wholly-state-owned banks, and to let AMC's to recover NPLs as far as possible ,with AMCs acting primarily as owners of equity assets. In 2000, the upper limit for the four AMCs to take over NPLs from the four banks was set at 1.3 trillion Yuan, which was equivalent to about 15 percent of china's GDP. Meanwhile, another estimate indicates that at the end of 1997 small and medium-sized banks in china had a total of 90 billion Yuan in NPLs, equivalent to 14.4 percent of their total loan-books. Even after this transfer, asset quality problems persist with NPL ratios approaching 25-40% of loans outstanding. Many of China's other commercial banks are also experiencing much greater levels of NPLs than their international counterparts.The problem of NPLs is not an isolated one .it grows out of rapid expansion of bank lending to ill-performed state-owned enterprises, and out of low profitability in the banks' operations. One result of fast expansion of bank lending is the relative shrinking of bank capital base ,which has further deteriorated as a result of low profitability or even loss-making .in 1998, the Chinese government issued a so-called 'special government bond' of 270 billion Yuan and put all the money into the four banks as equity capital, sharply increasing the capital/total assets ratio for...
