It's a typical Beijing winter's day: freezing cold and filled with sunshine. Fortunately, the modern headquarters of the China Development Bank in the west of Beijing is well heated, and in any case governor Chen Yuan seems completely unaffected by the weather.

Tall and dignified, Chen looks every inch the scion of a successful family. His father, a household name, was a top economist whose career spanned the turbulence of the Mao Zedong period - during which he opposed the Great Leap Forward - to the more orthodox days of China's opening up and reform under Deng Xiaoping.

Chen Yuan is also an economist, and he has made the China Development Bank his home for the past six years. As we sit down in adjacent armchairs in his office, he begins to outline his plans for an organization that is never far from the heart of China's financial reforms.

Speaking excellent English, Chen is especially keen to spell out the market credentials of the CDB.

"Many people believe that as a policy bank we are simply a fiscal agent of the central government. In fact, we have pushed this bank to act as a template for bank modernization. The government does not subsidize us. We get our revenues in the classic way, from the interest rate spread between the bonds we issue and the project we lend to, as well as from underwriting corporate bonds for our clients," he says.

Like development banks in developed countries, the profit motive of the CDB is twinned with a mission of social responsibility. CDB lends to projects, especially in China's vast and underdeveloped interior, where other banks fear to tread.

"We look at the province of Sichuan and provinces to the west of that, but we have also invested about an equally amount in the northeast of the country," he says.

"But we don't lend to projects where we don't think there is a very good chance of getting our money back," he adds.

The balance between profit and social responsibility is a difficult one, but Chen explains it thus.

"We act as the incubator to the public sector. For example, we originally provided loans for the Three Gorges dam project. Slowly, a company arose out of the project, and it's now about to be listed. At that moment, it will have transited from an old-style state-owned company to something much more market-driven," he says.

The northeast is traditionally China's heavy industry base, first built up by the Japanese in the 1930s and then under the Communists following 'liberation' in 1949. For fifty years its giant factories helped churn out the equipment and vehicles used by the PLA. But the area was especially hard hit during the reform period, and over half the state-owned enterprises in the region closed down.

It's the closure of such SOEs that has helped saddle Chinese banks with enormous levels of non-performing loans, estimated by some economists to be up to half of total loans.

And it's the banks that are at the nexus of China's change. They have fuelled China's 8% headline growth for the last twenty years - but they have paid the price of being subject to the whims of the central and regional bureaucracy.

It's the instability of the banking system that makes the coming year an acutely sensitive one. Inflation is at a six year high, with cars, retail and real estate seeing growth rates of 30% last year. That's putting pressure on the government to raise interest rates - which could in turn force the banks to pay more to their depositors, make life harder for SOE clients by raising the cost of capital, pull money out of the stock market and lead to a sell down in the bond market.

The latter would be especially sensitive to the CDB since it funds itself from long-term bond issues - which permit the bank to fund longer term than its commercial bank competitors.

Yet Chen refuses to give way to panic.

"Yes, I'm a bit worried about the coming year. The country has a huge reform effort going on with regard to the listing of Bank of China and China Construction Bank - precisely at the moment that the financial system is under strain from possible overheating," he says.

"But we are nowhere near the level of overheating that occurred ten years ago, so it's important to keep things in perspective. Most importantly, the government has ways of reducing overheating through the kinds of administrative methods that premier Zhu Rongji used to rein in runaway inflation in the early 1990s. These include the use of lending quotas and raising bank reserve requirements from 6% to 7% - as the government has already done," he points out.

Indeed, these imaginative techniques, such as the recent $45 billion recapitalization of Bank of China and China Construction Bank from the foreign exchange reserves rather than from fresh debt, have permitted China to dodge problems many conventional economists predicted could have serious consequences.

"A lot of things are going right here. The banks are facing more than their fair share of problems, but I believe this year will see some major and successful policy changes," concludes Chen.