Abstract
Several rounds of banking reforms in China have aimed to increase the competitive condition and further enhance stability in the Chinese banking sector, while the joint effects of competition and risk-taking behaviour on the profitability in the banking sector have not been studied well enough so far in the literature. The current study contributes to the empirical literature by testing the impacts of risk and competition on profitability in the Chinese banking industry (state-owned, joint-stock and city commercial banks) over the period 2003–2011 under a one-step Generalized Method of Moments (GMM) system estimator. The results do not show any robust finding with regards to the impacts of competition and risk on bank profitability, while it is found that Chinese bank profitability is affected by taxation, overhead cost, labour productivity and inflation. The study provides policy implications to the Chinese banking industry and different ownership types of Chinese commercial banks.
Highlights
As an important part of the financial system, the banking sector plays a more and more important role in the development of China’s economy
We focus on the analysis of bank profitability in China due to the fact that it reflects the bank management and, especially nowadays in the Chinese banking industry, as all the banks are encouraged to be listed in the stock exchange to obtain external monitoring and funds, a higher profitability can increase the competitiveness of the bank
The findings further suggest that GDP has a significant and positive impact on Net Interest Margin (NIM) and PBT of Chinese commercial banks; this result can be explained by the fact that the demand for lending increases during the periods of economic boom, which leads to an improvement in bank profitability
Summary
As an important part of the financial system, the banking sector plays a more and more important role in the development of China’s economy. Several rounds of banking reforms in China have aimed to create a more competitive environment and improve the bank performance. Stronger competition does not necessarily contribute to improvement in profitability. The Structure-Conduct-Performance (SCP) hypothesis argues that in a highly concentrated banking market where competition is lower, the banks tend to collude with each other to obtain supernormal profit. Concentration in the Chinese banking sector is quite high compared to other countries. Comparing with other countries, such as Luxembourg, Germany, and Austria at the same year, the five-bank concentration ratios of which are much lower, with Luxembourg (31.2%), Germany (33.5%) and Austria (0.4%) (European Central Bank structural financial indicators 2011)
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