dispose the non - performing assets left over from the past, particularly during the period when the management of the enterprises were not separated from government administration. otherwise the disposal of non - performing assets would be nothing but transferring the risks from the “ left pocket ” to the “ right pocket ” of the government, which will invite criticism from the public. second, the asset management companies have been established to handle the non - performing assets in a professional way. it should be noted that the assets they are dealing with are not good assets, but those classified as doubtful or loss. in terms of value preservation and enhancement, different methods are required for handling the non - performing assets and the good assets. when seeking to recover the bad assets, we need to strike a proper balance between quantity and speed. although the value of some assets will go up after they have been held for a considerable period of time, in most cases, the longer the assets have been held, the less their value will become. in this sense, the so - called “ ice cream effect ” does exist. on the other hand, the asset management companies seeking to dispose the non - performing assets very rapidly will likely face criticism, since people think that more will be recovered if the assets are disposed less rapidly. third, against the background of market - oriented reform, the disposal of non - performing assets will be done through the market. therefore, measures should be taken to develop the market and enable the assets to be disposed at the prices formed through market competition. this requires that market participants be under hard budget constraints, having sound financial system, clearly defined ownership and well established incentive structure. regarding incentives, the government should set a clear baseline for the recovery of the non - performing assets, and establish an effective incentives system that will encourage the asset management companies to make the greatest efforts in recovering the assets. problems will occur in the market - based disposal of non - performing assets if any of the above - mentioned measures are not taken properly. what can the government do? first, steps should be taken to improve the legal framework. although we have in place a regulation on asset management companies, there are weaknesses in the formulation, administration and enforcement of laws and regulations governing the disposal of nonperforming assets. international comparison shows that china needs to make improvement in this area. second, apart from the four state - owned asset management companies, private and foreign participants should be encouraged to enter this market to promote competition. third, internal reforms should be carried

out in the four state - owned asset management companies to enable them to operate on real commercial basis with hard budget constraints. fourth, when the market has not been fully developed, it is desirable to let the institutions with rich market experiences to make price evaluation so as to avoid soft constraints and set up internal incentives. fifth, efforts should be made to establish proper incentives. without incentives or with very weak incentives, it is not possible to preserve and enhance the value of the assets and make maximum recovery. without effective incentives, people may also tend to seek personal gains from the disposal of assets. sixth, it is important to have appropriate procedures and prevent any improper practices so that the assets are disposed through market competition. however, if the market is not strong enough – for example, market participants are under soft constraints or there are adverse internal incentives, improper behaviors may arise even with sound procedures, and the procedures themselves may become a shelter disguising those improper activities. seventh, it is crucial to develop market intermediaries, since the disposal of assets relies importantly on the integrity and services of the intermediaries. eighth, the objectives of setting up asset management companies are not only to dispose the nonperforming assets in a professional way, but also to make the commercial banks stronger so that they will be able to provide better financial services. so the government needs to consider how to handle the relationship between the asset management companies and the commercial banks. the asset management companies will not operate satisfactorily and there will be much criticism from the public if the above are not handled properly. the state council attaches great importance to the issues concerning the asset management companies. premier wen jiabao has said that “ the asset management companies have had five years ’ experiences in disposing the non - performing assets, and it is time for them to carefully review the experiences and lessons and try to resolve the long - term problems ”. apart from promoting more effective internal management of the asset management companies and strengthening external regulation and supervision on them, the government has much more to do. from the longer - term point of view, china will need a well - functioning capital market to enable its economy to develop soundly.