THERE is no more potent symbol of the relative decline of Western finance than the revolution in Chinese banking over the past decade. While American and European banks have been busy blowing up, China's have been transformed from communist bureaucracies crippled by bad debts into something resembling world beaters.

That metamorphosis has been completed by the flotation of Agricultural Bank of China, the last of the five big state-owned banks to list (see article). Even by Chinese standards it is colossal, with 320m customers, 441,000 staff and more branches than many Wall Street firms have desks. Four of the world's ten biggest banks by market value are now Chinese. In 2004 none was. Better-known (and more global) lenders such as Deutsche Bank and Barclays look rather puny by comparison. It's natural to wonder if more than just firms are being eclipsed: whether a freewheeling era is being superseded by a “Beijing consensus” of state-managed finance. Though neat, such a conclusion looks wrongheaded.

Whatever their colour, these cats catch mice

As all bankers know, league tables can mislead. Still, China's rise is more solid than that of Japan's banks in the 1980s. Finance has huge potential in China—less than 1% of AgBank's retail customers have mortgages. And the country's banks had a good crisis, largely because they never entirely left the government's embrace. So although they make money and have the trappings of public companies, the state owns a majority stake and the Communist Party appoints the top brass, whose pay is a fraction of that of their Western peers. Those bosses, with their dual role as party bigwigs and chief executives, are beholden to a higher authority than the stockmarket. Their regulators, meanwhile, wield supposedly crude tools to control banks, such as lending caps and reserve ratios, long dismissed by “light touch” supervisors elsewhere. And the system is pretty closed. Some foreign banks have minority stakes in Chinese firms. But foreigners' own operations on the mainland have a market share of less than 1% by profits, while Chinese banks make less than 4% of their profits abroad.

This patriotic model has done well. Rich countries tried to kick-start their economies by getting central banks to lend to banks, which, frustratingly, have hoarded the liquidity. As in 1999 after the Asian crisis, China's politicians just cut out the middleman and told the banks to supply more credit. Loans grew spectacularly, from 102% of GDP in 2008 to 127% in 2009, funding everything from motorways through paddy fields to yuppie flats in Pudong. Growth stayed strong and China won many admirers. In India and Brazil it is no longer retrograde to argue that state-controlled banks should help counteract the economic cycle. Even in rich countries with privately owned banks, supervisors are eyeing the tools used by China's regulators to control credit. Communist Party diktat has been relabelled as “macroprudential supervision”.

Even admirers, though, cannot fail to spot China's bad-debt problem. Those who think capitalist democracies have an unrivalled talent for generating dud loans should consider the Middle Kingdom. After decades of mismanagement, by the late 1990s perhaps a third of all loans were sour, most of them owed by zombie state-owned enterprises. Cleaning that up left China a world leader in bail-outs. Since 1998 it has injected the equivalent of $420 billion into the biggest five banks alone, more than the outlays of America's TARP bail-out fund. China's reforms were meant to stop this ever happening again.

A repeat performance is exactly what some fear after the latest binge. Most worrying are loans to infrastructure projects sponsored by local governments (perhaps a sixth of outstanding loans) and, given a frothy property market, real-estate financing and mortgages (a fifth of the total, with some overlap with infrastructure loans). China's bankers say they are relaxed but some investors are kept awake by visions of corrupt officials, roads to nowhere and deserted shopping malls.

Although potentially severe, these bad debts will not be the downfall of the Beijing model of banking. Even if a chunk of the loans is written off, the system can absorb the hit. That is partly thanks to an impressive regulator, which has prodded the banks to raise capital this year—by about an eighth, if all goes to plan. But it is mainly because of China's high savings rate. With piles of excess deposits banks do not rely on fickle debt markets for funding. That buys them time to earn their way out of a bad-debt problem, using their high lending profits to replenish capital. As a backstop, China's government, with little debt and large foreign reserves, has deep pockets.

Capitalism with fewer Chinese characteristics

Indeed, there is only one thing that will guarantee the demise of China's present model of banking: success. If China manages to digest its recent lending boom without a slump and then rebalance its economy away from investment and towards consumption, banks will need to free up space on their balance-sheets for lending to individuals and small firms. The heavy lifting of financing infrastructure and state companies will shift to bond markets. As customers have more sources of finance, banks' lending profits will be squeezed, forcing them to diversify into capital-market activities like underwriting. Banks' buffers of deposits should also shrink, relative to loans, as the savings rate falls and as people move cash into higher-return shares and bonds (earning banks fees in the process).

China's banks could then end up looking a lot like banks elsewhere, although the state will still have control. Yet even that could change gradually. At current growth rates China's banks will need capital injections every few years. The government may tire of these shakedowns—its participation in this year's equity raisings has been a little grudging—and allow its stake to be diluted instead. And, as China's banks claim their rightful place among the global leaders, they will find doing big foreign deals is hard when the government has a hand on the steering wheel. The rise of China's banks is stunning and a little frightening. Yet they are not the pallbearers of market-based finance, just a work in progress.