Chinese banks' net income surged to record highs last year, defying the slowing growth on the world's second-largest economy. Is it indicating that banks are resilient to the economic downturn?

Not necessarily.

The banks have a tendency to be lagging indicators. Only after a certain amount of time has passed will China's macro situation show up on the bottom line.

Take, for example, bad loans. They're finally growing, incrementally, after years of declining. Industrial & Commercial Bank of China Ltd., the nation's largest bank by assets, saw its nonperforming loans rise by 3.82 billion yuan (about $606 million) in the fourth quarter; China Construction Bank Corp., the No. 2 bank on the mainland, reported a 6.27 billion yuan rise in such loans. Bank of China Ltd.'s bad loans in the fourth quarter rose 1.39 billion yuan. (In China, nonperforming loans are those that have at least a 30% chance of turning sour.)

Smaller banks also saw some increases in bad loans. China Minsheng Banking Corp., the country's largest non-state-owned bank, posted a rise of 200 million yuan in nonperforming loans in 2011. Such loans at Industrial Bank Co. grew by 99 million yuan last year.

More tellingly, data from the Chinese banking regulator showed that the nonperforming loan ratio in the nation's banking sector edged up 0.1 percentage point in the fourth quarter from the third quarter, the first rise in the past six years.

The regulator didn't give a reason, but the earnings reports from Chinese banks this week offered some cues: The property market might be the culprit.

China Construction Bank said among the total, its nonperforming loans related to the real estate sector surged 20% over the same period. Minsheng Bank said the nonperforming ratio of its real estate financing businesses was 1.72%, well above its overall bad loan ratio of 0.63%.

Home prices have been under pressure for about two years, but it's only now do we see a sign of it in banks' statements. The question is whether investors see a few more problem numbers down the road.

In three years starting 2009, banks in China issued a total of 25 trillion yuan of renminbi-denominated loans, with roughly 40% of the lending going to government-initiated infrastructure projects and the property sector.

'The second quarter of this year will be one of the peak seasons for the repayment of property loans and local government borrowings. With a slowing economy, we can expect that higher nonperforming loans are on the cards,' GF Securities analyst Mu Hua said in a recent note.

According to Noah Wealth Management, a Chinese financial service company, a total of 117.25 billion yuan of property trust products will be due this year, well above the 47.05 billion yuan last year, putting huge pressure on property developers' cash flows.

Besides property, analysts say local government borrowings will present a bigger challenge to banks. Banking executives have estimated that a third of China's 10.7 trillion yuan government debt will be due this year and the next.

Standard & Poor's analyst Liao Qiang said he believes Beijing will likely give some regulatory forbearance to local government debt to prevent a surge in banks' bad loans. 'Nevertheless, property developers and manufacturers in industries with a supply glut will continue to face policy-induced refinancing uncertainties from time to time,' he said.

Monday in Hong Kong, China Construction Bank Chairman Wang Hongzhang said he's optimistic about the bank's asset quality, given China's economic growth is likely to remain solid. 'Nonperforming loan levels are controllable. Even though they are higher than before, the amount is small and [the rise] is likely to be temporary,' he said.

-------Provided by Division of Information of Hunan Jiatai Chemical Co.,Ltd