China’s banks have come a long way since the days of full state ownership and perpetual near- insolvency. But they have not come far enough. This week, they revealed that they face default on Rmb1,550bn of loans indirectly made to local governments – one-fifth of the total lent (Rmb7,770bn). These figures are a sobering reminder that, for all the progress made in recent years, the transformation of the Chinese banking sector is still far from complete.

The latest revelations can be traced back to Beijing’s 2008 stimulus policies. Where other countries drained their public finances to kickstart their economies, China shifted much of the burden on to domestic banks – many of which are listed companies. This was stimulus by stealth: private investors, which own up to a quarter of China’s largest banks, effectively subsidised Beijing’s spending spree. The government simply did not have the organisational means to run a sizeable stimulus through the central budget.

With many of the resulting loans directed to low return public works projects, many feared a return to darker times. As it happens, the banks appear to have got off relatively lightly. As Qu Hongbin,the chief China economist at HSBC, put it: “The fact that nearly 80 per cent of those projects have at least some capacity to service their debt is quite amazing.”