Two of China's top banks yesterday posted record quarterly earnings, reflecting solid economic growth and waning anxiety about bad debts.

The Agricultural Bank of China and the Bank of China, the country's No. 3 and 4 lenders, kicked off the earnings season for the sector as China tries to steer the world's No. 2 economy to a soft landing after a year of strong stimulus spending.

Despite the risk to bank growth from the government's monetary tightening, the latest results should help revive the sector's depressed valuations.

China banking stocks surged in October after lagging the market for much of the year.

"Banks are benefiting from expanding net interest margins, especially after last week's interest rate hikes, and that would offset the impact of slowing lending due to government tightening," said Paul Lee, analyst at Tai Fook Securities.

"Previous concerns over bad loans were overdone, but what remains uncertain is whether regulators next year would urge lenders to increase their provisions, which would potentially erode earnings."

BOC reported a 29 percent rise in quarterly profit while AgBank, which strengthened its books through its US$22.1 billion initial public offering in July, reported a 30 percent gain. Both results beat analyst forecasts.

China's economy expanded 9.6 percent in the third quarter, better than expected and emboldening the government to introduce measures to cool growth and tame inflation, reversing a policy last year that stimulated record lending.

The nation's banks are walking a fine line during the recovery, as they try to behave more like commercial lenders after years of being state-directed institutions with little concern for their bottom lines.

All have made IPOs in the last five years to burnish their commercial credentials, raising tens of billions of dollars even as the central government remained as controlling shareholder.

But they responded promptly to the country's call to support the economy during the global financial crisis by making record new loans.

Earlier this month, China's central bank urged the country's biggest lenders to put aside more cash as reserves and last week raised key interest rates to tighten liquidity.

The banks have also planned to raise tens of billions in new funds through various capital raising exercises to bolster their balance sheets after their 2009 lending binge.

Three of China's "Top Four" lenders, the Industrial and Commercial Bank of China, BOC and China Construction Bank, will likely conduct their planned rights issue by the end of this year.

Analysts said monetary tightening would help increase banks' bargaining power in setting loan prices.