China's Non‐Performing Bank Loan Crisis: the role of economic rents

Abstract

Various reasons have been put forward to explain the massive accumulation of non‐performing loans in China. This paper applies the financial‐restraint model as the analytical framework and argues that failure to create sufficient economic rents is the chief reason underlying the current dismal performance of banks. While the formal financial system is less important than the informal system—especially for financing the private enterprises that are playing a crucial role in economic growth—not addressing the non‐performing loan crisis in the formal financial system will likely invite an economic slow‐down.