Q: On a related note, officials in China have recently stated that some of the nation's banks have been asked to limit lending after they failed to meet requirements including those for capital - does this portend something ominous for the capital markets going forward?

A: There's a reason why they have trouble meeting requirements. Chinese banks are having great difficulty getting up to standard in the modern economy.

For decades, economic decisions were political decisions, and investment patterns conformed to the political visions of the party bosses. A successful bank manager was skilled at conforming to the political wishes of his superiors, while at the same time building his own patronage network below him. There was little economics to be found - it was all about personal networking, where an investment loan was a reward for loyalty. This is a prime recipe for political cronyism, and by the time China made a turn toward the market in the 1980s, the crony network in the banking system was firmly established and lucrative.

So what's going to happen when the political masters start to say that bankers should start paying attention to profitability when making loans - but not too much because it was still a socialist economy with a public investment policy? First they're going to get ignored. Mixed signals. The norm for decades was to grant loans on the basis of political clout and patronage, and it would not easily be dislodged by confusing directives. When some manager's colleague's nephew who belongs to the party had a business deal in the works, he wasn't going to turn the guy down and be disloyal to the party.

This was the base from which they tried to reform banking. Over the past few decades, the reformers have been chipping away at the old system, and establishing commercial banking standards bit by bit, bank by bank. It's only in recent decades that the lead banks (China has a lot of banks) started to come on board and adopt the kind of professionalism that makes for successful banking. But a large enough chunk of the banking system is still stuck in the era of cronyism, and there's still a huge problem of non-performing loans, especially in the western provinces. The government and the leading banks are pushing for high commercial standards with increasing resolve, but there's still a long way to go (though I must admit they've made rapid progress).

So there are two reasons for the government to limit lending. Part of it is for macroeconomic stabilization, to keep the growth steady without inflationary bubbles. But a major part of it is because too many loans are still being made for the wrong reasons, and the resulting high default rate is dragging the real growth rate down, with inflationary results (not to mention productivity results).

For investors it's a good sign, because it's meant to rein in the businesses you don't want to invest in anyway. But you still need good information before you venture in, because some of the big players are still riding on political clout and don't really have the fundamentals to hold up in the long run.

Eoin Treacy's view The trajectory of standards of governance is an important factor when considering which country to invest in for the long-term. On the one hand we see that standards of financial governance have been slipping in the West while improving in countries such as China. Is it therefore unreasonable to expect that some of the better investment opportunities will appear more in the latter than the former for as long as this situation continues?