As we just mentioned, China's banking sector had a spectacular first half. The country's listed banks saw better-than-expected growth in their mid-year performance report. But experts say the good results don't tell the whole story. Qi Tianxing explains.

China's banking sector had a spectacular first half. The  country's listed banks saw better-than-expected growth in  their mid-year performance report.

The 14 listed lenders have all seen their net profit grow dramatically in the first half, despite the domestic tightening monetary policy and inflation pressure. The Industrial and Commercial Bank of China became the world's most profitable bank with an after-tax profit of over 64 billion yuan. Among them, China CITIC Bank reported the biggest net profit growth of over 160 percent, and the other five banks also saw their profits more than doubled.

For sources of profit growth, expansion of interest margin is believed to be the main reason.

Peng Xingyun,Researcher Institute of Finance and Banking,Cass,said,"First, the central bank raised the interest rate several times last year, which cause the growth of major commercial banks' interest margins to exceed 3 percent. Second, The banks' lending rate was steady at a high level of 14 to 15 percent in the first half. Third, the economy as a whole grew as expected and helped bring huge profits to banking sector. Fourth, the intermediate business has increased a lot in the first half."

Another reason is a reduction in the corporate income tax from 33 percent to 25 percent. The tax took effect in the beginning of this year and brought down tax costs for the banks.

However, shining performance reports can not hide concerns that the rapid growth will be difficult to maintain given existing risks.

The mid-year reports show that 30 percent of banks' loans went to the property sector, which are stagnant. Analysts say over-investment in high-risk sectors like the property and stock markets may hurt banking performance.

Experts point out that slowing economic growth has driven up loan demands, so commercial banks should improve its risk assessment and controls. Meanwhile, banks should promote their intermediate business rather than depending mainly on interest margins.

Peng Xingyun,Researcher Institute of Finance and Banking,Cass,said,"In China, intermediate business makes up only 10 to 14 percent of the banks' total income , that's much lower than in developed countries."

Investment in overseas assets is another area where risks could emerge. The Bank of China suffered the slowest interim profit growth compared to other banks, mainly because of its substantial assets held overseas, and because of the subprime mortgage crisis in the United States. But the lender says the negative impact is less than expected.

Zhu Min,Vice President Bank of China,said,"At the end of June, the carrying value of debt securities issued by US mortgage financier Freddie Mac and Fannie Mae held by the Bank of China stood at 10.6 billion US dollars. 99 percent are of triple-A ratings. So far, interest payments and principal repayments are going well."

Analysts say Chinese banks have gradually reduced their holdings on such securities, and that generally speaking, the impact of the US subprime mortgage crisis should not be excessive.