China may be garlanding the nation's bankers as “model workers”, but as every model knows, fashion can be fickle. This year's loan explosion has many fretting over a commensurate rise in bad debts. And with good reason: at 31 per cent of gross domestic product, the Rmb8,185bn of new loans pumped out between January and August is more than was seen in Japan in the late 1980s, or the US during Greenspan's bubble. We all know how those turned out.

China's riposte is that its banks are healthy. In aggregate, they are: published monthly data shows non-performing loans falling metronomically for the past five years, to 1.8 per cent at the end of June. But lean in more closely, and the pulse flickers. Sharply rising NPLs could erode already thin capital bases, especially outside the Big Four lenders. As Citigroup notes, Shanghai Pudong Development Bank and Minsheng, which number seven and eight by assets, barely meet the local minimum legal requirement of 8 per cent capital adequacy, let alone the regulator's guidance of 10 per cent.

The industry's best specimens, meanwhile, are still digesting the consequences of the last state-directed lending spree. In 1999 Industrial & Commercial Bank of China, number one by assets, sold its bad debts to state-owned Huarong Asset Management for Rmb313bn of government-guaranteed bonds in return. Some of these bonds are due later this year. Now, as China's budget deficit widens to fund its stimulus, guess what: Huarong (translation: “the prosperity of China”) may not be prosperous enough to meet those debts, even with a state guarantee. Other euphemistically-named vehicles are in a similar pickle. In the case of Cinda (“trust and development”), due to pay Rmb247bn to China Construction Bank earlier this week, the Ministry of Finance has simply extended the maturity of the bonds for a decade, with the interest unchanged at 2.25 per cent.