Determinants of financial performance in Chinese banking

Abstract

China's banking system has undergone gradual reform since 1978, with a view to improving efficiency and resource allocation. Recent reforms have focused on allowing banks to list some shares on domestic and foreign exchanges, greater foreign equity participation in Chinese banks and the establishment of new rural financial institutions. To assess whether these objectives have been achieved, this study looks at how well different types of Chinese banks have performed between 1999 and 2006, and tests for the factors influencing performance. It also evaluates four measures of performance to identify which one, if any, is superior. The independent variables include the standard financial ratios, those which reflect more recent reforms (listing, bank type, the extent of foreign ownership) and macroeconomic variables. The results suggest Economic Value Added (EVA) and the Net Interest Margin (NIM) do better than the more conventional measures of profitability, namely Return On Average Equity (ROAE) and Return On Average Assets (ROAA). Some macroeconomic variables and financial ratios are significant with the expected signs. Though the type of bank is influential, bank size is not. Neither the percentage of foreign ownership nor bank listings has a discernable effect.