A Chinese national flag flies in front of the China Construction Bank (CCB) Tower in Hong Kong's Central business district. Photo: Reuters / Tyrone Siu

Earnings data from China’s largest three banks released this week showed unexpected profit growth for 2016, but as the Wall Street Journal reports, data also underscored a troubling decline in interest payments.

Net interest income for Industrial and Commercial Bank of China fell 7.1%, while for both China Construction Bank and Agricultural Bank of China the measure fell 8.7%. It was the first time since 2008 that major Chinese lenders saw a decrease in interest payments.

Banks are feeling the effects of Beijing’s efforts to restrict money-market liquidity, which have pushed up funding costs, while the corporate sector is weighed down with high levels of debt, slowing demand and capital controls.

As corporate borrowing has slowed, banks have been turning to other sources of income, such as “shadow-banking” investment products. But government scrutiny of such products is building, and avenues for growth may continue to dwindle.

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