Bank Profitability Analysis in China: Stochastic Frontier Approach

Abstract

China’s banking system has a relatively high level of state control, while an important task in regulating the banking system is to manage the profitability of banks. Using the stochastic frontier approach to assess the profitability of commercial banks not only allows for the bank’s ability to generate profits relative to the leading banks in the industry to be assessed but also takes into account the specifics of the management technologies used and the influence of the market environment. This article analyzes the profitability of the Chinese banking system for the period 2012–2020 using the stochastic frontier approach from the position of the central bank. The specifics of the analysis from the bank’s perspective imply a focus on the position of most banks regarding the level of best practices and trends in changing the overall level of profitability. Analysis may be of interest to banking regulators and researchers. In general, the Chinese banking system demonstrates a high level of profit efficiency and cost efficiency, although the dynamics of these indicators are negative. The reason for the negative dynamics is a decrease in the economic growth rate of the economy, the instability of the financial market and ongoing reforms. State-owned commercial banks are becoming highly profitable, while national joint-stock commercial banks are facing increasing competition and reducing efficiency of profitability. City and rural commercial banks maintain a high level of profitability due to state support.