The High Profitability of Big Chinese State-Owned Banks and China’s Growth Model

Abstract

A striking feature of China’s amazing growth in the last 35 years or so is the declining share of labor income as a share of the overall national income of China. This article makes a contribution to the ongoing discussion of how to explain this empirical finding by analyzing the sources of the high profitability of big Chinese state-owned banks. Using the methodology of an international peer group financial indicator analysis combined with a simple regression model it can be shown that the comparatively high profitability of Chinese banks depends on their ability to wield some monopoly power on both the product as well as the labor market. Other than stressed in the relevant financial literature the high profitability is not merely the result of an artificially high interest rate margin. The empirical findings indicate that it is above all the result of comparatively low staff expenses, which in turn explains why the share of labor income is declining.