In the Mao Era and beyond the state-owned enterpriseswere subsidized by the central government. These large deficits were a financial burden on the central government. After some thrashing about following Deng Xiaoping's Four Modernizations Program the central government in Beijing began to carry out some meaningful reforms.

One of the supposed reforms that looked like a move toward a market economy but is in fact a sham is the shift from government grants to cover SOE's deficits to requiring the SOE's to depend upon loans from the state commercial banks. The state banks must make the loans but the SOE's do not have repay the loans. Thus the state banks takes the saving deposits of the Chinese public and gives those funds to SOE's which will never repay. The loans to the SOE's show up on the books of the State banks as assets but they are entirely worthless. It is estimated by Standard & Poor that at the end of 1999 the proportion of non-performing loans in the state commercial banks of China was in the range of 50 to 70 percent. The Central Bank of China admits that proportion was at least 25 percent. In 2000 the government organized a recapitalization of the state commercial banks in which non-performing loans with a nominal value equivalent to $157 billion were transferred to a state agencies, called asset management companies, in exchange for government securities. The asset management companies are not likely to obtain any substantial return from those bad loans. What the asset management companies are likely to end of with is worthless equity in the SOE's. In effect, the government instead of giving grants to cover the deficits of the SOE's year-by-year accepted responsibility for the accumulated deficits all in one big block. Interesting the Central Bank put the proportion of non-performing loans in the state commercial banks at 25 percent after the recapitalization, the same figure it gave for the proportion before the recapitalization. This indicates that the true proportion before recapitalization was at least 50 percent, consistent with the Standard & Poor's estimate. The bankrupt state of the state commercial banks is not the only problem with financial institutions in China. The credit cooperatives which function as banks in the rural areas of China are in far worse condition. Illegal financial organizations which are formed to circumvent the government restrictions on interest rates are also financially unsound and a risk to the financial stability of China. The official Chinese government position is that the state banks are sound and that the SOE's are earning a profit. The government-reported profit of the SOE's in 1998 was about the equivalent of $6 billion. Gordon Chang notes that this is a profit of $6 billion after a subsidy of $18 billion which means that really the SOE's had a loss of $12 billion. The government also reported that increased by almost 80 percent in 1999 and 140 percent in 2000. Clearly the figures are meaningless because they could have arisen simply by an increase in the government subsidies in 1999 and 2000.