China's banks have relatively short histories. And in a centrally planned economy such as China's, the distinction between government handouts and bank loans has always been confused. After all, it was all in the family. Equally, the distinction between state enterprises that didn't want to repay and those that were not able to repay didn't mean much either. But in an economy that has to become more efficient if its people's incomes and standards of living are to continue rising, funds need to flow to those who can best use them.
Nobody knows exactly how many bad debts Chinese banks carry.
But China needs healthy banks to support economic growth on a sustained basis. Without the banks, either growth will falter, or the government itself will go bankrupt as its massive spending binges overwhelm its revenues. The banks are especially important in China because, as in Japan, they are far more crucial than either the equity market or the bond market as a source of funds. The over-reliance of Japan on its banks should be a negative model for China. Asset-management companies have been created to take the banks' bad debts and swap them into equity, and in 1996 Beijing injected a total of 270 billion renminbi, so the banks' balance sheets look reasonable.