Massive bankruptcies among small businesses causes soured loans in Zhejiang Province to balloon by over 50%.

Soured debts at China’s 3,800 banks increased for a third straight quarter to US$71.8 billion in June, said the China Banking Regulatory Commission, the banking sector regulator. It is the longest streak of deterioration in eight years and puts the spotlight on the pressures on asset quality and profit growth.

The government blamed most of the increase on the eastern Chinese province of Zhejiang where bankruptcies among small businesses caused soured debts to jump by over 50% in the first half. The city of Wenzhou has been identified as the epicenter of the bad loan tsunami.

One analyst said the banking sector is a bit worried about the industry’s asset quality as bad loans may climb if the economic slowdown deepens, Loan growth is another concern, he added.

China’s economy grew 7.6% in the second quarter, the slowest pace in three years. Industrial companies’ profits fell 2.2% in the first half, compared with a 29% improvement in the same period last year.