China has always shied away from Big Bang financial restructuring. But the rapidly accelerating succession of reforms reshaping the mainland's banking sector together add up to a slow-motion explosion whose reverberations will be heard for years to come. Most eye-catching will be the initial public offering later this month of China Construction Bank (CCB), which is to be listed on the Hong Kong stock exchange in a flotation likely to raise $50 billion and possibly as much as $60 billion. But although the offering for CCB will certainly be the most spectacular evidence yet of Chinese financial reform, in reality it is just one step in a 25-year programme which is designed to transform the mainland's banks from sprawling and inefficient offshoots of the finance ministry into competitive commercial enterprises. Reform still has a long way to run. Even after years of painful restructuring, China's two flagship listing candidates, CCB and Bank of China, remain riddled with inefficiencies and problem loans. Industrial and Commercial Bank of China, the mainland's biggest lender, is in even worse shape and restructuring has hardly begun at the Agricultural Bank of China, the fourth of the Big Four state-owned commercial banks. Even so, that CCB is now deemed ready to sell its shares on international capital markets emphasises how far and fast restructuring has proceeded. Just a few years ago, China's banks were widely regarded as toxic waste, threatening to poison the whole country's economic development. After the banks went on a wild lending spree in the 1990s, analysts estimated that only half of the borrowers were paying back their loans. The value of bad debt in the system was reckoned at anything from three trillion yuan to seven trillion yuan, easily dwarfing the US$145 billion to US$175 billion cost of America's savings-and-loans crisis in the 1980s. Beijing began to tackle the problem in 1998, injecting some 270 billion yuan of fresh capital into the Big Four banks and transferring 1.4 trillion yuan of bad debt off their balance sheets and into four asset management companies. At the same time the authorities began to push the banks into behaving less like slush funds for favoured state industries and more like commercial lenders. Banks were exhorted to improve their governance, tighten credit allocation procedures and increase provisioning against bad debt. Above all, they were encouraged to enlist foreign banks as strategic investors who would bring much-needed capital, risk management technology and management know-how. From the Chinese side, this made good sense. Under the terms of its accession to the World Trade Organisation, China had agreed to open up its domestic banking market to foreign competition by 2007. Bringing in foreign investors early, it was hoped, would raise the standards of products and services, and act as a competitive spur to Chinese banks to lift their game ahead of full opening. At first, foreign institutions trod carefully, for the most part buying only small stakes in the sounder second-tier banks with an eye to launching specific products. In December 2002, for example, Citigroup acquired a 5 per cent stake in Shanghai Pudong Development Bank for US$67 million in order to launch a credit-card joint venture. HSBC ratcheted up the pace in 2003 with its US$1.75 billion purchase of a 20 per cent share in Bank of Communications, China's fifth biggest lender which it successfully listed in Hong Kong in June in a $17 billion initial public offering, the first international share sale for a Chinese bank. But even HSBC's bold move has been eclipsed by recent events. As the Big Four banks reduced their bad-debt levels to less than 5 per cent, increasing numbers of foreign firms began circling. In June, Bank of America Corp pounced, buying a 9 per cent stake in CCB for US$3 billion. Others soon followed. In August, Royal Bank of Scotland led a three-member consortium to acquire a 10 per cent slice of Bank of China for US$3 billion. In the past few weeks Switzerland's UBS has confirmed it is to invest US$500 million in Bank of China, Germany's Allianz and Goldman Sachs have agreed to buy into Industrial and Commercial Bank of China alongside American Express, and jet-engines-to-financial-services conglomerate GE is to take a 7 per cent stake in Shenzhen Development Bank. All these buyers are hoping to capture a share of China's potentially vast financial services market, but whether these deals turn out to be as good for their investors as they are for the Chinese sellers remains to be seen. Although China's banks have improved their risk management capabilities, they remain shot through with doubtful loans. Any deterioration in Chinese economic growth could easily push non-performing loan levels up to 15 per cent or more, triggering another banking crisis and undermining the value of the banks' equity capital. If that happens, the anticipated Big Bang in Chinese banking could well turn into a damp squib for investors.