After spending time combing through the financial reports of China's biggest publicly traded, state- owned banks, I now understand what Jim Chanos, the famous short-seller, means when he keeps saying they are "built on quicksand". He's definitely on to something.

Start with Industrial & Commercial Bank of China (ICBC), the world's most valuable bank, at least on paper, with a €184bn market capitalisation. Much of its capital consists of the remnants of bad loans dating to the 1990s, which ICBC now calls receivables.

One such receivable represented about a third of ICBC's shareholder equity at the end of last December. It was scheduled to start coming due in 2010 but wasn't repaid, and still sits on ICBC's books at its original value. At the same time, ICBC has been reporting torrid, almost cartoonish, growth since going public in 2006. Total assets, about half of which are loans, rose 15pc last year to 15.5trn yuan (€1.9trn). Earnings jumped 26pc to 208.4bn yuan (€25.5bn).

It has been quite a transformation. At the end of 2004, before its most recent restructuring by the Chinese government, Beijing-based ICBC said about 21pc of its loans were nonperforming. Today, the same bank, which is 71pc state-owned, classifies less than 1pc of its loans that way.

Either the Chinese government has become extremely skilled at lending in a very short time, and Chinese borrowers have become even better at repaying. Or the numbers are too good to be true, in which case the quality of the bank's capital matters a great deal, as a gauge of its ability to absorb losses. If nothing else, a look at the receivables at ICBC and other large Chinese banks provides insights into what passes for normal in the country's banking system.

At Agricultural Bank of China, a receivable from the finance ministry represented 474.1bn yuan, or 73pc of shareholder equity at the end of last December. A 2008 notice from the ministry said the amount would be "settled annually over a period of 15 years." At least there the ministry has been paying the bank's receivable down.

A year earlier, Ag Bank showed the same asset at 568.4bn yuan, which was 5pc more than its equity then. It got the receivable as part of its last restructuring, in 2008, in exchange for transferring bad assets to the finance ministry.

As recently as 2007, Ag Bank classified about 24pc of its loans as nonperforming, compared with 1.4pc last quarter. After cleaning up its books, the company went public in 2010, raising the equivalent of €17.1bn in the largest IPO ever. The bank, which is 83pc state-owned, now has a €109bn market capitalisation.

The warning signs about China's construction boom and state-owned banks have been evident for years. The country's Big Four banks have each set up loan-loss reserves ranging from about two to three times the size of their non-performing loans, which probably are understated to begin with.

Those reserves wouldn't be enough should loan losses return to historical norms.

Foreign shareholders would suffer the brunt of any losses should the Chinese government need to inject capital or restructure the banks again. The banks would survive, though. The government is like Wall Street -- it always pays itself first.

Jonathan Weil is a columnist with Bloomberg. Maeve Dineen is on leave.

Irish Independent