A global consulting firm called on China to open up its bad-asset investor market to tackle the rising toxic assets in industrial sectors plagued by chronic overcapacity.

Boston Consulting Group (BCG) in a latest report suggested the government to open the bad-asset primary market to eligible investors in key regions.

China has four State-owned asset management companies (AMC) to take over non-performing assets from banks and resell them at a discount price. Fifteen regional bad-asset managers have also been set up recently. But the primary market still sees limited competition due to few players.

"In the past few years these players were enough because there were not much bad asset. Few targets even drove the four State AMCs to develop new businesses. But as bad assets are set to explode due to government's call to shed overcapacity, these players are not enough," said David He, a global partner of BCG.

Outstanding debts in China's coal, steel, metals and cement industries were estimated to be 5.4 trillion yuan（$835 billion） by the end of 2015, according to BCG. If 20 to 40 percent of the debt turned sour, the four sectors alone would unleash 1 to 2 trillion yuan of bad assets.

"When bidders are few, they have a strong bargaining power over banks. Most previous purchases of AMCs are state instructed, which also hide risk," he said.

Besides this, BCG also suggested the government to give tax incentives to encourage banks to accelerate the writing-off of bad assets. Commercial banks and securities firms should also boost their investment banking capability to offer buyout loans to boost takeovers.

It also suggested local government should set up more industrial consolidation funds, to leverage more private asset managers to invest in bad assets.