What explains the low profitability of chinese banks?

  1. García Herrero, Alicia
  2. Gavilá, Sergio
  3. Santabárbara García, Daniel
Journal:
Documentos de trabajo - Banco de España

ISSN: 0213-2710

Year of publication: 2009

Issue: 10

Pages: 9-35

Type: Working paper

More publications in: Documentos de trabajo - Banco de España

Sustainable development goals

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.