China should consider setting up a 100 billion yuan ($15 billion) enterprise exit fund to ensure better management of its over 6 trillion yuan of nonperforming assets, said Li Daokui, an economist at Tsinghua University and a former Chinese central bank monetary policy committee member.

Li, who is also a top political adviser, said the fund could be used for employee resettlement, salaries and welfare and would encourage local governments to dismantle inefficient firms.

Though the nation has gained immense experience from its 40 years of reform and opening-up by encouraging new players, it has always faced challenges due to the presence of a large number of inefficient firms.

There are still many zombie enterprises, or unprofitable firms that are reeling from mismanagement or overcapacity and are straddled with a high level of debt. About 5 to 10 percent of the companies in the industrial sector have racked up debts of over 6 trillion yuan, he said.

According to a document published by the State-owned Assets Supervision and Administration Commission of the State Council in 2016, there are around 2,041 zombie subsidiaries of central enterprises in the nation with assets of over 3 billion yuan. However, only 265 of them were asked to file for bankruptcy and restructuring, accounting for just 12.9 percent of the total, he said.

Li said the best way to solve the problem of zombie enterprises is the disposal of nonperforming assets.

Despite the government taking steps to curb growth of nonperforming assets, mushrooming nonperforming loans are compounding matters and led to a growth in the nonperforming loan balance of around 50 billion yuan in 2017.

To better address the problem, Li said that commercial banks must be urged to dispose of a certain ratio of nonperforming assets each year.

According to Li Jin, chief researcher at the China Enterprise Research Institute, central SOEs eliminated 1,200 zombie subsidiaries in 2017.

The steel industry has already eliminated zombie capacity totaling 5.95 million metric tons, while the figure in the coal industry was 27 million tons.

The SASAC has set a target of reducing the average debt-asset ratio of central SOEs by 2 percentage points prior to 2020.