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.

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