Article at a glance:

The promise and perils of China's banking system

• The development of China's banking system has been impressive. In 2005 foreign banks took stakes worth $18 billion in China's biggest banks—moves reflecting optimism about the sector's prospects as well as a recognition that the performance and governance of these institutions are much improved.
• However, some old ghosts continue to haunt the sector. Many Chinese banks lack the commercial skills or the mind-set to price loans appropriately and therefore lend too much money to underproductive state-owned enterprises. Few banks have mechanisms in place to prevent bad loans from accruing.
• Chinese companies get loans at abnormally low rates, which encourage overcapacity and inefficient investments in many sectors.
• All told, the inefficiencies in China's banking system cost the country $25 billion annually. By addressing this problem, China would raise its GDP by $259 billion a year.