Yet by the end of June, this staggering amount had been cut to 1.52 trillion yuan (US$183.1 billion), of which bad loans made up 15.59 per cent.

In other words, 370 billion yuan (US$44.58 billion) had been cut from the total, bad loans going down by 3.56 percentage points, reported Tuesday's China Daily.

The dramatic decrease in debt has been attributed to asset management companies, who have taken over non-performing assets and are working wonders with them.

The Bank of China and China Construction Bank transferred 278.7 billion yuan (US$33.58 billion) of non-performing loans to the Cinda Asset Management Corporation on June 21, some 75 per cent of all bad loans from the banks.

Figures from asset management companies indicate a huge increase in the number of poor assets they have disposed of in the second quarter over the first quarter, but there has been no commensurate cash receipt.

By the end of June, the four financial asset management companies, Huarong, Cinda, Orient and Great Wall, had disposed of bad assets of 567.3 billion yuan (US$68.3 billion) and recovered 112.83 billion yuan (US$13.6 billion) in cash.

The assets disposed of in the second quarter amounted to 38.58 billion yuan (US$4.65 billion), 99.79 per cent more than in the first quarter, while cash recovered only grew by 21.08 per cent.

The figures raise questions as to how poor assets can be got rid of so quickly for such poor returns.

Current rules and regulations state that the means that can be used to dispose of assets only include lease, transfer, restructure, debt-for-equity swaps, securitization, direct investment, bankruptcy settlement and anything else that is approved by the central bank.

Without major changes in the stipulations, assets that are disposed of in a given period should remain at a set level. Dramatic fluctuations are quite unlikely under current conditions.

In practice, the debt-for-equity swaps have not been popularized and securitization is also put off for various reasons.

The asset management companies are selling poor assets to qualified foreign financial institutions, which becomes one of the most important means of asset disposal. But the materials in the second quarter have proved that bad assets sold to foreign companies saw a decrease instead of an increase, which points to the need to verify figures of asset disposal between March and June.

The market is relatively closed. Participants are quite limited: only the four State-owned financial asset management companies, several small stock-holding asset management companies, the qualified foreign investment banks and funds and a few private institutions are allowed in the field.

These participants have formed a small, stable market. With no newcomers allowed in, the market has a set capacity of disposing of bad assets.

Judging from the market capacity, the dramatic growth in disposal in the second quarter still leaves questions.

The authorities have taken several measures to control the economy since the latter half of 2003. These moves met targets to cool down over-heated sectors of the economy in the second quarter of this year. Investment in iron and steel, property and cement has been checked.

Under this kind of economic climate, assets related to these sectors could be under estimated or under priced.

As a result, asset management companies would be reluctant to sell off assets for fear of hurting overall performance.

As a result, the number of bad assets got rid of should not have surged so remarkably.

Sluggish growth in the cash recovered from non-performing assets, coupled with a sharp rise in the number of assets actually disposed of, has pointed to a trend that needs urgent attention.

As the Bank of China, China Construction Bank and the Bank of Communications restructure and prepare for public offering, they are eagerly striving to meet the capital abundance rate and the bad loan rate stipulated by the banking regulatory bodies.

The simplest and fastest way to lower the bad loan rate is to transfer their non-performing assets to the State-owned asset management companies.

As a result, asset transfer and disposal are often conducted with administrative intervention, which inevitably enhances the risks of the asset management companies.

In summary, doubts over the huge growth of bad asset disposal in the second quarter have actually arisen out of concerns over potential risks that may be incurred by quick growth, and over loopholes in the financial system and the banking supervision system.

There is currently no effective mechanism to evaluate the efficiency of the disposal of non-performing assets. It seems to many that the assets, once transferred from commercial banks to the financial asset management companies, will be settled.

But the transfer is only suspending the problem. The key to measuring real loss caused by the assets is the percentages that are recovered.

When we examine the motives of the commercial banks' eagerness to go public, some of the banks seem to take public offering as an unprecedented opportunity to escape their responsibility in producing bad assets.

The absence of a market-orientated mechanism evaluating the performance of asset management companies may boost the negative effects of such evasion.