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THESE WOULD APPEAR TO BE GOOD TIMES TO BE A Chinese banker. Mainland banks are among the world’s biggest and most profitable lenders. In the first six months of 2012, China’s so-called Big Four commercial banks — Industrial and Commercial Bank of China, Bank of China, China Construction Banking Corp. and Agricultural Bank of China — amassed profits of $61 billion, more than twice as much as the four biggest U.S. lenders. ICBC, China’s biggest bank, alone reported profits of $19.7 billion, greater than those of JPMorgan Chase & Co. and Wells Fargo & Co. combined.

Those profits, however, have been produced in a benevolent environment of government controls and implicit support that provides China’s banks with sizable interest margins, a captive deposit base to fund operations and limited competition from nonbank financial companies. It’s a system that has regularly required banks to ignore moral hazard and finance government-backed investments. Those conditions may now be changing, though. As China’s economy slows and loans start to sour, banks are having to use more of their earnings to settle bad debts.

China’s commercial lenders also are facing fresh competitive challenges as Beijing introduces market reforms and tightens oversight of banking activities. In recent months China’s banking regulators have cracked down on the fees banks charge their customers and taken the first steps toward liberalizing interest rates. The government is introducing rules and capital requirements that are pushing domestic banks to properly recognize their own balance-sheet risks, including accounting for a growing pile of doubtful loans.

As a result of these twin pressures, Chinese bank profits are certain to get squeezed, says Dong Tao, chief Asia economist for Credit Suisse in Hong Kong. “The heyday of China’s banking sector is behind us,” he says. “The monopolistic profits and high margins that banks have enjoyed over the last decade are entirely unjustified.”

The health of China’s banks is crucial because of their size and the role they play in the country’s economy. Beijing has used the big state-controlled banks as effective policy levers; much of the government’s 4 trillion yuan ($635 billion) stimulus program that revived the economy in 2009 was conducted through bank lending.

On paper, at least, the banks appear stronger and better capitalized than at any time in the past three decades. Many of these firms are reporting profitability margins and capital levels that rival or outstrip most of their Western counterparts. The country’s ten biggest banks showed an average core capital adequacy ratio of 9.5 percent at the end of June and a return on assets of 1.28 percent, according to Pricewaterhouse­Coopers estimates. U.S. banks had an average tier-1 ratio of 13.21 percent at the end of June; return on assets in the third quarter stood at 0.06 percent at Bank of America Corp., 0.11 percent at Citigroup, 0.99 percent at JPMorgan Chase and 1.49 percent at Wells Fargo.