A report on the misuse of funds by China's four state-owned asset management companies (AMCs) released by auditors on Tuesday has cast doubt on their ability to manage bad debts.

Analysts said yesterday the AMCs would have to work hard to improve their corporate governance mechanisms and internal control systems to be able to face challenges lying ahead.

Last year, auditors found irregularities and cases of misuse of funds involving a combined 71.5 billion yuan (US$8.6 billion), which accounted for 13 percent of all funds audited.

The AMCs were quick to respond to the audit results. They have pledged to penalize those responsible and to close loopholes in the system.

China Cinda Asset Management Corporation said on Wednesday that it would set up a financial risk research centre to study measures for more effective bad debt resolution.

China Orient Asset Management Corporation has started a 10-day education program for staffers on compliance.

But more hard work lies ahead, analysts say. "From the very beginning, when the AMCs were created, there was already the absence of a sound corporate governance structure," Yan Qingming, director of the Banking Supervision Department under the China Banking Regulatory Commission, told a seminar on Wednesday.

"Regulators need to scrutinize their corporate governance policies," he said, adding that his commission and the Ministry of Finance are working on measures to enhance the supervision of the AMCs, including stricter information disclosure requirements.

Wang Songqi, a senior economist at the Chinese Academy of Social Sciences, is less supportive.

"It's quite expensive and inefficient to operate asset management companies like these," he said.

"Why do we need them in the first place if what they are doing can simply be done by some other intermediaries or by the banks themselves?" Wang added.

The four AMCs were established in 1999 to take over a combined 1.4 trillion yuan (US$168 billion) of bad loans from the big four state-owned commercial banks in a major drive to resolve bad debt issues in the banking sector.

The AMCs had disposed of 688.6 billion yuan (US$83 billion) of non-performing loans by the end of March, recovering cash equivalents of about 20 percent of their face value, which some analysts say underperformed other emerging markets.

In addition to accusations of inefficiency, analysts are uncertain about the competence of the AMCs to be successful debt clearers.

The AMCs are allowed to work as commercial debt clearers only if they have completed their policy-based bad loans disposal commitments by the end of next year.

The AMCs might not only find it difficult to win commercial deals once their privileges are revoked with increased market reforms, they will also face fierce competition in investment banking, an area they plan to venture into, analysts say.

The Ministry of Finance, currently the sole owner of the four AMCs, is soliciting opinions from the firms about a draft reform plan, which requires them to undergo joint stock restructuring and working with strategic investors both local and foreign, sources said.

(China Daily July 1, 2005)