A SOUND banking system is the very rock on which developed economies are anchored, so is the slowdown in China's reform of its own banking system cause for alarm? Massive non-performing loans to state industry have ensured that China's bank reforms will remain stuck in low gear while the Government wrestles with the problems of the state sector. Although it has promised reform in the state-owned sector, weeding out the inefficient and the obsolete, it must balance the changes with social change. It cannot afford effectively to lay off millions of workers without offering them some sort of safety net. Meanwhile, the bad debts of state firms keep piling up at the foot of China's banking system. It is a dilemma which will take years to unwind, and is a graphic illustration of the painful road to a freer economy.