Although it sounds screwed up, Chinese banks (SOBs -- State Owned Banks) and SOEs (State Owned Enterprises) have been bailed out by the BOC (Bank of China) for a long time now. That seems to be the system. Defaults are common, arguably due to the fact that these bailouts happen. It's getting a lot of press now, but it seems partially due to the need for justification for imposition of western governance systems on Chinese business. It's particularly relevant now, when just last week A-shares were traded by foreign investors for the first time in China and WTO regulations are taking hold. I think that the entrance of foreign investment and the consequences that come with that will force China into a mode where they need to bring their risk levels down and won't need to be bailed out anyway... such is competition.

Will investors really demand risk levels be brought down, or will they simply hope for big profits like in the big Russian bond fiasco? I hope global investors are getting smarter...

What is the difference between A shares and other types of shares in China?

If Chinese banks got into big trouble with nonperforming loans like Japanese banks, would you see a similarly heavy effect on the economy, or would the bailouts just allow everything to continue to run without much trouble?

B-shares historically are only by foreign investors but were opened to the Chinese in 2001 (I think) and A-shares are traded domestically and in RMB. There's also something called an H-share which trades in Hong Kong. I don't know anything about them.

There's already a pretty serious problem with NPL's. Some estimates say that >%50 of loans are NPL's in China. I don't know what reality is here. Basically, there's a great slack created because firms don't have any incentive to reduce that slack if the goverment continues to bail them out.

There's also a vicious circle that's created between the banks and the firms. The banks lend to the firms, which waste the money which then require the banks to perform poorly in the international world. This is where the competition will get nasty between Chinese banks and foreign banks.

I guess the biggest fear is a collapse of sorts because the system won't be nimble enough to move with the changes in economic demands. For the time being, things look okay, and even promising though. Equity financing, although still an extremely small part of firms financing, is on the rise, and foreign banks are being given more freedom. We'll see pretty soon I guess how it'll play out.

Hmmm. Very informative, my newly-educated friend. ;) They are stuffing some facts into your head after all... hehe.

chinese banks are in dire straits...unfortunately, despite many attempts for reforms, the human aspects or resistance to change is still a major problem...many of the heads in these banks are just trying to cover their own arses.

it quite common,things are changing now

Please don't worry about Chinese banking system. The government currently has the most talented people worrying about it. I am confident that they will do their jobs.

(Internally, they are very worried)