Hope I'm not boring everyone but I was looking into the battery protection IC's a little closer and found something that may explain the 'balancing' problem with cheap cells. This spec sheet for this particular chip indicates that the 'balancing circuit' operates only when one cell (or pair if a MS) exceeds the overcharge voltage. Then it appears that the circuit goes into a balancing mode that drains current from the higher voltage cell(s) to the lower voltage cell(s) until a) the cell voltages are the same or b) the higher voltage cell(s) reaches the 'overcharge release voltage' which is about 4.013V (depends on temperature). Based on this, it seems that if the cells were close to the same 'health' and they both ended up near the same voltage when the first cell reached the charging cutoff voltage, the balancing circuit could equalize the charge level every time. If one cell was much weaker, the charging would stop when the stronger cell hit the limit and the balancing operation would attempt to equalize them but terminate before the cells were at the same voltage. Repeated failures to balance could then be cumulative and the pack would terminate charging at a lower and lower voltage as the voltage difference between the cells increased.

Or maybe I'm just reading the spec sheet wrong. It's a bit unclear and appears to have been translated to English from another language.