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What explains the low profitability of Chinese banks?

Author

Listed:
  • Alicia García-Herrero

    () (Banco Bilbao Vizcaya Argentaria)

  • Sergio Gavilá

    () (Banco de España)

  • Daniel Santabárbara

    () (Banco de España)

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.

Suggested Citation

  • Alicia García-Herrero & Sergio Gavilá & Daniel Santabárbara, 2009. "What explains the low profitability of Chinese banks?," Working Papers 0910, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0910
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    China; Bank profitability; Bank reform;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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