While Japan's recession and its wobbly banks distract much of the world, the banking sector in China is in much worse shape. Xinhua News Agency has reported that central bank governor Dai Xianglong admits that nonperforming loans (NPLs) account for 26.6 percent of total lending by China's top four state-owned commercial banks. As of the end of September, NPLs held by these financial institutions totaled 1.8 trillion yuan ($217 billion).

One estimate puts China's NPLs at between $500 billion and $600 billion. Of this amount, four asset-management companies (Huarong, Great Wall Asset Management, China Orient Asset Management and Cinda Asset Management) are holding 170 billion yuan. Now the AMCs, each holding nonperforming assets of the four major banks, are beginning to seek foreign investors to buy some of the NPLs.

For its party, Huarong auctioned off 16.6 billion yuan of the NPLs it held for ICBC. Of this amount, 10.8 billion yuan worth of NPLs were sold to a consortium led by Morgan Stanley and including Lehman Brothers.