The stability of the banking system, the protection of intellectual property, and adherence to trade commitments are just a few of the long-term issues facing China. They are also the foremost problems in the minds of senior managers of multinational corporations that are already there, contemplating expansion, or considering whether to jump in for the first time; international investors worry about them as well. The following questions and answers, based on McKinsey's experience working with China's government and with Chinese and foreign companies doing business in the country, offer a view of how the country is handling these and other long-term concerns.

What is the condition of China's financial system?

Our view is that most banks are performing much better today than they were a few years ago, although they are carrying massive amounts of bad debt from the days when their primary role was to help maintain employment by supporting state enterprises. Today banks have improved their operating systems and skills, and they have a much stronger risk-management culture.

Indeed, banks are on a strong upward trajectory, and many are quite profitable: in 2003, two of the largest—Industrial and Commercial Bank of China and China Construction Bank—earned operating...