Lowering the rate of bad assets is important for China's State-owned commercial banks so they can set up a modern financial system and sharpen their competitive edge.

At the end of last year, the weighted average rate of non-performing loans of the country's four State-owned commercial banks stood at 26.12 per cent. By the end of March this year, this figure had decreased to 24.13 per cent, with the four banks' outstanding balance of bad loans reduced by 70 billion yuan (US$8.5 billion).

Despite this achievement, the absolute amount of bad loans of the State-owned commercial banks - Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China - is still high. The banks have a long way to go to cut their bad-loan rate to below 10 per cent. Worse, as the structure of bad loans further deteriorates, the potential losses resulting from the remaining bad loans keep growing.

A high rate of bad loans will directly lower banks' liquidity, weaken their ability to clear debts and hinder the introduction of a modern financial system. Furthermore, a high rate of bad loans makes it difficult for the State-owned commercial banks to compete with their foreign counterparts, which are rushing into the Chinese market.

Currently, the State-owned commercial banks are planning to list on the stock market. This target requires that they improve their handling of bad loans.

But there are many difficulties in addressing bad loans.

Over the past few years, some relatively profitable bad loans have already been transferred into good loans or equity. But the operating profits of some other debtor enterprises have continued to drop, and these enterprises' ability to pay off debts has also shrunk, further worsening the quality of bad loans.

In addition, there is a lack of innovative means to deal with bad loans. An effective incentive mechanism is also absent.

Now that the China Banking Regulatory Commission has been set up, it should take some concrete action to speed up the disposal of bad loans.

First, policies should be worked out to allow the State-owned commercial banks to play part of the role of an asset-management company. Commercial banks could sell bad loans to asset-management companies or other investment institutions in China or abroad.

Commercial banks should be authorized to sell or transfer debt rights at a price below the face value.

Meanwhile, preferential and incentive policies should be worked out for commercial banks to retrieve the value of bad loans. The State-owned commercial banks should be encouraged to utilize their own operating profits to deal with bad loans. There should be exemptions from some duplicated taxes or fees on banks disposing of bad loans.

Second, the asset-management system should be further reformed to accelerate the disposal of bad loans according to market principles and using professional skills.

Third, the quality of newly granted loans should be strictly controlled to optimize the structure of banks' loans.

It is important to control new bad loans. Commercial banks should utilize all kinds of marketing measures to explore clients with a good reputation. New loans should focus on new economic growth points. Business supervision and risk control should be stepped up.

Fourth, market principles should be stressed in the disposal of bad loans.

Basic measures should be further developed for pressing for the payment of debts, launching lawsuits and auditing bad debts. New measures should be tried, such as reorganization and securitization.

Intermediary sources in China and abroad should be fully tapped. Bad loans could be sold as packages to lower their disposal costs.

Finally, more financial back-up, such as monetary incentives, should be introduced to write off bad loans.