What explains the low profitability of Chinese banks?

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.