EconStor >
Frankfurt School of Finance and Management, Frankfurt a. M. >
Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/55214
  
Title:Understanding the high profitability of Chinese banks PDF Logo
Authors:Löchel, Horst
Li, Helena Xiang
Issue Date:2011
Series/Report no.:Working paper series // Frankfurt School of Finance & Management 177
Abstract:The big Chinese state-owned banks came as winners out of the global financial crisis. According to the Banker ranking, Chinese banks led the global banking profitability ranking through the years from 2008 to 2010 and contributed one fifth of global banking profits in 2010. The Chinese banking sector, which was deemed as wholly insolvent ten years ago, was reborn like a phoenix from the fire of the Asian financial crisis and the current financial crisis. The banking reform in the last decade with large-scale capital injection, assets carve-outs, restructuring and public listing celebrated great success. However, the low efficiency in Chinese banks is still persistent, as evident in many empirical studies (e.g. Feyzioglu, (2009)). The contradiction of high profitability and low efficiency causes great confusion in understanding banking in China. Our paper aims to reveal the real sources of the high profitability of the big Chinese banks. We compare their profitability pattern with peer banks from Asia, Europe and North America. We first test the hypothesis that the average asset return of the big five Chinese banks will fall below the international comparative level if the current high net interest margin given by the managed interest system in China falls to the international peer average level. Surprisingly, the hypothesis has to be rejected. Instead, our results show that the profitability of Chinese banks stays at international comparative level, despite the high inefficiency in Chinese banks. We therefore test a second hypothesis stating that the profitability of Chinese banks will fallbelow their international peers if staff costs increase by 30 percent in average to reach the international level, with the joint condition of margin decrease. This hypothesis can be proved, which means that the big five Chinese banks compensate its inefficiency by a combination of a non-competitive high interest margin and unsustainable lower labor cost. The above results of course raise the question how the big Chinese banks can stay competitive if China continues to liberalize its interest rate system and labor cost increases. In our concluding remarks, we discuss the possibility that Chinese banks change their business model towards universal banking with additional non-interest income to compensate the drop in interest margin.
Subjects:China
banks
finance
banking business model
universal banking
JEL:G01
G20
G21
G28
Document Type:Working Paper
Appears in Collections:Frankfurt School - Working Paper Series, Frankfurt School of Finance and Management

Files in This Item:
File Description SizeFormat
684912104.pdf288.33 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/55214

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.