What Explains the Low Profitability of Chinese Banks?

34 Pages Posted: 3 Jun 2009

See all articles by Alicia García-Herrero

Alicia García-Herrero

Bruegel; Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS); Natixis

Sergio Gavila

Banco de España

Daniel Santabárbara

Banco de España

Multiple version iconThere are 2 versions of this paper

Date Written: June 2, 2009

Abstract

This paper analyzes empirically what explains the low profitability of Chinese banks for the period 1997-2004. We find that better capitalized banks tend to be more profitable. The same is true for banks with a relatively larger share of deposits and for more X-efficient banks. In addition, a less concentrated banking system increases bank profitability, which basically reflects that the four state-owned commercial banks - China’s largest banks - have been the main drag for system’s profitability. We find the same negative influence for China’s development banks (so called Policy Banks), which are fully state-owned. Instead, more market oriented banks, such as joint-stock commercial banks, tend to be more profitable, which again points to the influence of government intervention in explaining bank performance in China. These findings should not come as a surprise for a banking system which has long been functioning as a mechanism for transferring huge savings to meet public policy goals.

Keywords: China, bank profitability, bank reform

JEL Classification: G21, G28

Suggested Citation

Garcia-Herrero, Alicia and Gavila, Sergio and Santabárbara, Daniel, What Explains the Low Profitability of Chinese Banks? (June 2, 2009). Banco de Espana Working Paper No. 0910, Available at SSRN: https://ssrn.com/abstract=1413123 or http://dx.doi.org/10.2139/ssrn.1413123

Alicia Garcia-Herrero (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS) ( email )

IAS 2019, Lo Ka Chung Building,
Lee Shau Kee Campus, HKUST
Clear Water Bay, Kowloon
Hong Kong

Natixis ( email )

France

Sergio Gavila

Banco de España ( email )

Madrid 28014
Spain

Daniel Santabárbara

Banco de España ( email )

C/ Alcalá, 48
Madrid, 28014
Spain

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