Last week, China Construction Bank, the world's second-largest lender by market capitalisation, said the government would deny it a bail-out for at least another decade.

News that Chinese banks need to be bailed out at all will come as a surprise to most people outside the industry, who rightly assume the country has escaped the worst of the global crisis. But CCB's problems stem not from the recent meltdown but the near-collapse of the country's financial system a decade ago, one that is still not adequately resolved.

After decades of government-directed lending to unprofitable state enterprises, the financial system reached the brink of collapse in the wake of the 1997 Asian crisis. Well over a third of loans were not being repaid and virtually every lender was technically insolvent.

Beijing's solution was a mixture of clever accounting and procrastination that allowed the largest lenders to regain their footing, sell shares to some of the biggest names in finance, list on the Hong Kong and Shanghai stock exchanges and eventually become highly profitable just as their international counterparts disintegrated.

The three largest banks in the world are now all Chinese although a few years ago they were wards of the state and struggling to survive. CCB's profits in the first half of the year were Rmb56bn ($8bn) at a time when many western counterparts have had to go cap in hand to their governments to keep them afloat.

But the bank's announcement is a timely reminder that China has not properly dealt with its own domestic financial crisis after more than a decade of reforms and restructuring.

In 1999 and 2000 the government transferred Rmb1,400bn of non-performing loans from the country's largest banks to four newly established “asset management companies”, or “bad banks”.

The bad banks' job was to restructure and repackage the loans to try to recover as much of the original outlay as possible, often through sales or auctions of assets held as collateral.

The bad loans were transferred at their original value, mostly in exchange for 10-year bonds that paid 2.25 per cent a year. This allowed the banks to turn holes in their balance sheets into interest-bearing assets, which remain on their books.

The Rmb247bn worth of bonds issued in 1999 to CCB in exchange for a large chunk of its bad loans were due to expire last week, but CCB said the ministry of finance had decided to extend their maturity for another 10 years.

That decision is seen as a likely precedent for the Rmb1,000bn or so of bad bank bonds at the big state banks. But the longer the settling of the original bail-out bill is delayed, the less likely it is that the bad banks will be able to repay the principal.

In the wake of the initial bail-outs, it became clear that the government would need to carve out another large chunk of bad loans from the banks.

So, starting in 2003, it transferred another Rmb1,000bn in non-performing loans to the bad banks, this time in exchange for a variety of government-backed bonds, often at discounts to their face value.

In the early years, the bad banks reported aggregate recovery rates of 20-30 per cent of the face value of the bad loans but in the past three years they have not reported recovery rates and analysts say they are probably massively insolvent.

In a report last year, China's state auditor said it was concerned that the bad banks were no longer able to pay the interest, let alone the principal, on the bonds they had issued. In order to placate international investors in the run-up to the banks' initial public offerings, the ministry of finance said in 2005 that it would guarantee those bonds but the banks have warned that this is not a legal guarantee.