Stratfor has been reporting on this issue for about a year. Finally people are starting to see what's going on, and it's being publicly said that there are serious issues within Chinese banking sector. Earnst and Young were not the only ones - their report was followed by a number of other reports that also placed the numbers of bad loans between 500B and 1T. Some have said that it may be even worse, due to lack of transparency in the Chinese banking system.
They're headed the same place Japan went to when its economy collapsed in the 90s. Except China is far less prepared to deal with that fallout.
China's bad loans have been used in doomsday scenarios for the last 10 years. I remember clearly during the Asian Financial Crisis of 1997, the economic pundits predicted China's economy to crash in 1998. It's 2006 now.
China is not headed for the same place as Japan. Japan's main issue was real estate inflation and a saturating market. China has plenty of domestic market to go toward.
The same people who believe that China's bad loans are going to tank their economy are the people who think the United States' large debt will tank the American economy.