The problem of bad loans is not new to the Chinese banking sector. In fact every time the Indian government is criticized of ignoring asset quality of PSU banks fingers are pointed to China. In late 1980s and 1990s, most of the state-owned enterprises were loss-making. These were reliant on bank credit to continue financing their activities. As a result, the ratio of bad loans to total credit rose to as high as 30% by 1999. Even today the largest banks in China are government owned and have state orders to continue funding PSU growth. As per an article in Financial Times, China's ranking in terms of systemic risk in the banking sector is 4th in the world. Japan, US and France claim the top thre e positions.

However as a percentage of GDP, China's risk exposure appears hardly anything to worry about. While countries like Cyprus, UK and Greece seem to be most vulnerable, China's ranking is 17th! The disconnect is easy to fathom. Most of the bad loans in China today no more appear in the books of banks. Before the big Chinese banks got listed in Hong Kong exchanges, the bad loans were shifted to asset management companies or simply written off. Such shadow banking is the secret to Chinese banking sector's apparent resilience to economic downturn.