China’s banks have come a long way since the days of full state ownership and perpetual near-insolvency. But they have not come far enough. This week, they revealed that they face default on Rmb1,550bn of loans indirectly made to local governments – one-fifth of the total lent (Rmb7,770bn). These figures are a sobering reminder that, for all the progress made in recent years, the transformation of the Chinese banking sector is still far from complete. Louise Lucas analyses Chinese banks testing on property loans.