China’s leaders have fired the opening salvo in what might turn out to be the battle of the banks.

Late last week, in parallel with an interest rate cut to boost growth, China’s central bank moved to allow the market a greater role in setting lending and deposit rates – kicking off a long awaited reform of China’s creaking financial sector and threatening to eat away the main source of banks’ profitability.

What’s the problem with the old approach to setting interest rates, and what’s at stake in reform? China Real Time lays it out with a little help from The Wall Street Journal’s chart wizards in Hong Kong.

China’s banking sector is concentrated. The big four state owned banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China, control almost 50% of deposits. The same number for the top four banks in the U.S. is 35%.

A wide government-set margin between the deposit and lending interest rates means the banks are guaranteed a substantial profit on every yuan they lend out.

That amounts to a license to print money. China’s big banks are massively profitable. In 2011, despite a slowdown in the economy and a credit crunch for small businesses, ICBC clocked profit growth of 32%, most of it from the interest margin.

China’s leaders worry that easy profits have made the big banks lazy — too willing to continue channeling loans to state owned enterprises and infrastructure projects that drove the last stage of China’s growth, and not willing enough to start lending to small businesses and entrepreneurs that will drive the next stage. Loans to small business account for just 18% of banks’ loan book.