A report on the misuse of funds by the nation's four State-owned asset management companies (AMCs) released by auditors on Tuesday has cast doubt on their ability to operate as commercial bad debt clearers, as was planned.

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

The AMCs were quick to respond to criticism, pledging to penalize those responsible and take measures to close system loopholes.

China Cinda Asset Management Corporation said on Wednesday it would set up a financial risk research centre to study measures to reduce moral hazards in the process of bad loan resolution.

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

But more hard work lies ahead, analysts say. "The absence of a sound corporate governance structure started from the very moment the asset management companies were created," Yan Qingming, director of the Banking Supervision Department under the China Banking Regulatory Commission, told a seminar on Wednesday.

"Regulators need to strengthen scrutiny over their corporate governance," he said, adding his commission and the finance ministry are working on measures to enhance supervision of the AMCs, including stricter information disclosure requirements.

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

"It's quite expensive and inefficient to operate asset management companies like them," 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?"

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 clean up the bad loan-ridden 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 equivalent to a little more than 20 per cent of their face value, which some analysts say underperformed other emerging markets.

Amid accusations of inefficiency, analysts are uncertain about the competence of the AMCs to successfully become debt clearers.

The AMCs are allowed to work as commercial debt clearers if they finish their policy-based bad loan disposal work, with which they were tasked upon their establishment, by the end of next year.

While they may find it difficult to win commercial deals once their privileges are revoked when market reforms deepen, the companies will also face fierce competition in investment banking, which they plan as another business arena, 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 usher in strategic investors from both home and abroad, sources said previously.