China’s Changing Business Model of Banking

Abstract

The recent turmoil of the global financial system urges both academics and professionals to rethink the fundamental question of the appropriate banking business model. The recent suggestion of President Obama to separate investment banking from commercial banking recalls the come back of the Glass-Steagall Act, i. e. the return to the separate banking business model similar to the reaction after the word economic depression in 1930s. This turn around is particularly of interest for China due to the fact that Chinese banks just moving the other way around after a track record of more than thirty years reform policy. Surprisingly enough, academic research about the gradual change of the banking business model in China towards a specific type of universal banking system is still rare especially in an international context. The current paper aims to shed some light in this regard by conducting a comparative study based on data of banks from China, Europe, the UK and the USA. The analysis reveals that that the profitability of Chinese banks is mainly bolstered by the still guaranteed interest margin set by the central bank. Moreover, the risk pricing mechanism in loan business as evident in Western peer banks is not yet established well in China’s banking sector. Therefore, the diversification in fee and commission income is most important for Chinese banks to leverage their competitiveness. The high concentration of the current revenue sources on lending in Chinese banks can not sustain if the interest margin narrows in a more liberalized interest and exchange rate environment. The equity participating of Chinese banks in asset management companies shows already first results in generating synergies in terms of scale and scope. However, it will be shown that this transformation is so far not accompanied with an inappropriate leverage of risks due to a prudent regulatory environment, which limits non-interest income business of Chinese banks to service fees and provisions from customers instead of trade for own account. Given the momentum of stricter bank regulation on an international level as well, a system convergence between Western and Chinese banking business model could be expected in a foreseeable time.