BEIJING: China's banking sector, once considered the weakest link in the nation's economy, has had a spectacular first half, with one lender now touting itself as the most profitable bank in the world.



Profits have soared due to rising interest revenues and a cut in the income tax, analysts said, but they warned that a slowdown in the economy could hit borrowers? ability to pay back loans in the second half.

?The banking sector saw sharp and better-than-expected growth in the first half, but challenges remain,? said Jin Lin, a Shanghai-based analyst with Everbright Securities in Shanghai. ?In the second half, the most critical challenge for the banks will be a worsening in asset quality as ... we will be approaching a trough in the business cycle.?

Industrial and Commercial Bank of China, the nation's top lender, said last week it had become the world's most profitable bank in the first half after earning $9.4 billion, up 56.8 percent over the same period in 2007.

Some other banks reported even higher growth rates, with CITIC Bank posting an increase of 161.5 percent ? the biggest among all Chinese lenders that have released their interim reports so far. The outstanding performance of the banking sector contrasts starkly with more moderate growth in other industries, reflecting a slowdown in the Chinese economy. The average profit growth of the 1,178 listed firms who had published their interim results by Monday was 30.9 percent.

While impressive by most standards, it was still less than half the rate of the 70 percent achieved in the first six months of 2007.

Just a decade ago, economists warned that the banks were the sector that could cause the entire Chinese house of cards to collapse. But several factors have contributed to the turnaround, analysts and economists said.