Euphoria, mad rush, and ............. crisis ?

The biggest-ever initial public offering completed recently by ICBC, China's largest bank, has brought into focus the problems facing the Chinese banking system, as the euphoria evaporates. According to analysts, reforms in the banking system are a long way from completion and Chinese lenders may be headed towards a crisis if a culture of risk management is not ingrained into the lending practices. A Bloomberg story titled "China's IPO Revolution May Be Long March to Doom" highlights the problems of large bad debts and compares the mad rush for Chinese banks' IPOs with the dotcom era. Here are some excerpts from the story:

Nothing underscores China's financial rise in this century more than this month's share sale by Industrial & Commercial Bank of China Ltd. Those who got a piece of the deal may fancy themselves as winners. They now have a pivotal stake in the China-growth story. Looking under the surface, though, it's hard not to wonder what some of these buyers are thinking. Just as investors who had rushed indiscriminately into dot-com shares in the 1990s regretted it, so may those betting on Chinese banks.

Much of the euphoria surrounds China's efforts to clean up banks saddled with bad debt. The Beijing-based bank, China's largest, faces the challenge of balancing rapid growth against proper risk-screening after a $141 billion government bailout of bad loans. Chinese bank lending jumped almost 50 percent in the first half in a nation that is likely to expand more than 10 percent this year.

Loan growth is impressive, but those new loans are not seasoned yet. Nobody can tell whether there will be another massive bad-loan problem in the future. The question isn't whether China is reducing the bad loans of the past; it's whether sufficient steps are being taken to keep loans made today, tomorrow or next year from going bad.