Chinese Banks Research Articles

The Impacts of New Financial Instrument Accounting Standards on Chinese Commercial Banks

On March 31, 2017, the Ministry of Finance revised and issued three new financial instrument accounting standards including Accounting Standards for Enterprises No.22- Recognition and Measurement of Financial Instruments. The banks of China’s A and H stocks have implemented the new standards since January 1, 2018. From January 1, 2021, the scope of implementation of the standards covers all non-listed commercial banks. The new financial instrument standards have undergone great changes in the classification and impairment treatment of financial assets, which is bound to have a profound impact on Chinese commercial banks. This article analyzes the impacts of new standards on Chinese commercial banks from the aspects of financial asset classification and measurement, impairment, credit risk management, profit and earnings management. Finally, the paper puts forward several suggestions and measures on the system and model construction, credit policy and post-loan risk management and talent training, in order to facilitate banks smooth the transition to the new standards.

Shifting balances of systemic risk in the Chinese banking sector: Determinants and trends

We examine the evolution and factors of systemic risk in the Chinese banking sector over the last decade from the perspective of domestic and international investors. We apply the SRISK measure of systemic risk to a representative sample of listed Chinese institutions that captures up to 60% of total banking assets and utilize the Granger-causality network-based approach to demonstrate interlinkages among Chinese banks beyond the largest financial institutions. We show a dramatic increase in systemic risk after 2011 and the increased contribution of small- and medium-sized banks. We also identify causal relationships from housing prices, economic policy uncertainty and shadow banking towards systemic risk and from shadow banking to housing prices. According to our results, the concerns from both domestic and international investors about the stability of the Chinese banking system are well justified and a systemic event could be caused by distress in a Chinese financial institution outside the group of the largest banks.

Riding the FinTech innovation wave: FinTech, patents and bank performance

This research examines the impact of financial technology innovation on Chinese banks' performance, using both patent data and FinTech development index, by applying a generalized method of moments model to resolve potential endogeneity. While the results show that FinTech innovation reduces banks' profitability and asset quality in the aggregate, a finding more pronounced for large state-owned commercial banks, it improves banks' capital adequacy and management efficiency, though to a smaller degree for policy banks and state-owned commercial banks. Moreover, banks' own specific FinTech capabilities, measured by patent applications and claims, have similar effects on bank performance. The implications are that when facing the development of FinTech, banks should focus more on the rising capabilities of FinTech technology than its difficulties and what the competition is doing. Small banks can particularly achieve business process reengineering and innovation more reliably by actively cooperating with FinTech companies.

Concentrated Commonalities and Systemic Risk in China’s Banking System: A Contagion Network Approach

Chinese banking system has seen increasing convergence in exposures to different asset types. This concentrated commonalities have far reaching implications on systemic financial risk. By subdividing banks' assets on their balance sheets into 20 types, we construct a bipartite financial network using China's data in 2019 and 2020. A linear model is proposed to measure each bank's systemic importance (SI) and indirect vulnerability (IV), and the contagion strength between pair-wise banks (C), with respect to exogenous shocks originated from different sectors of the real economy. Results show that (1) concentrated common exposure to mortgage is demonstrated to be the most significant source of systemic vulnerability; (2) the derived contagion network shows the property of ``small world, which plays an important role in generating systemic risk, amplified non-linearly by multi-rounds of contagion; (3) Agricultural Bank of China along with seven other banks are identified as systemic important, Guangdong Development Bank as well as five other regional banks are suggested to be vulnerable, and Postal Savings Bank of China and China Construction Bank are critical nodes in transmitting risks. These findings contribute to more efficient and preciser macro prudential regulations.

Coopetition strategy and industry convergence. Evidence in the Chinese banking market.

ABSTRACT The paper examines the strategy adopted by banks in interacting with Fintech. In particular, among different options that range from partnership and acquisition, we investigate how big Banks relate to Bigtech firms. To investigate this question, we explore the strategy adopted by major Chinese banks in interacting with BigTech, using a case study approach. We focus on industry dynamics rather than inter-firm dynamics exploiting the drivers of the convergence process. Evidence reveals that coopetition strategy is adopted as a possible result of the evolutionary process of convergence in the industry. Convergence destabilizes sectoral equilibria, leading firms to generate a confluence of new value proposals, new technologies, and new markets reachable through a coopetition strategy.

Establishing a Credit Risk Evaluation System for SMEs Using the Soft Voting Fusion Model

In China, SMEs are facing financing difficulties, and commercial banks and financial institutions are the main financing channels for SMEs. Thus, a reasonable and efficient credit risk assessment system is important for credit markets. Based on traditional statistical methods and AI technology, a soft voting fusion model, which incorporates logistic regression, support vector machine (SVM), random forest (RF), eXtreme Gradient Boosting (XGBoost), and Light Gradient Boosting Machine (LightGBM), is constructed to improve the predictive accuracy of SMEs’ credit risk. To verify the feasibility and effectiveness of the proposed model, we use data from 123 SMEs nationwide that worked with a Chinese bank from 2016 to 2020, including financial information and default records. The results show that the accuracy of the soft voting fusion model is higher than that of a single machine learning (ML) algorithm, which provides a theoretical basis for the government to control credit risk in the future and offers important references for banks to make credit decisions.

The Vanishing Interest Income of Chinese Banks

Abstract Chinese banks likely have more nonperforming loans (NPLs) than officially reported. Banks’ NPLs often deviate from Benford's law. As hidden NPLs earn no interest income, loan quality problems may erode the gross interest income of banks. Using stochastic frontier analysis, we estimate the interest income of a hypothetical profit-maximizing Chinese bank with no credit quality problems. Taking the deviation of actual interest income from the calculated efficient income, we then attempt to reveal the amount of hidden NPLs in Chinese banks. Our results uncover a substantial weakening in the quality of Chinese bank loan portfolios in 2016.

A Study on Chinese Court Cases Regarding an Injunction Against a Counter-Guarantee

Purpose Focusing on recent Chinese court cases, this study aims to review the perspective of Chinese courts on fraud exceptions under a demand guarantee, and derive precaution points for a guarantor in demanding payment under a counter-guarantee. Design/Methodology/Approach A literature study is conducted in relation to recent Chinese court cases with reference to International Standard Demand Guarantee Practice and ICC official opinion related to guarantees or counter guarantees. Findings First, Chinese courts have restricted application of fraud exception since the provisions of China’s Supreme People’s Court on independent guarantees were enacted in 2016. Second, Chinese courts judged that it was a manifest fraud that a guarantor falsely made a demand despite discrepancies in the beneficiary’s demand under a guarantee. Third, counter guarantors must decide whether to pay within five business days following the day of presentation, but often times they delay payment thus being informed from the local court that the applicant has filed for an injunction. Research Implications Chinese courts’ frequent allowance for fraud exception in the past aroused worldwide complaints. However, since enactment of independent guarantee provisions, Chinese courts have rarely issued injunctions. Thus, guarantees and counter-guarantees issued by Chinese banks these days have accordingly been considered trustworthy.

Analysis of Chinese Commercial Banks’ Risk Management Efficiency Based on the PCA-DEA Approach

As a special type of enterprises with high risks, Chinese commercial banks’ risk management plays an important role in banks’ business process. Measuring and improving the risk management efficiency of the Chinese commercial banking system has recently attracted increasing interest. Previous studies analyze the business performance of commercial banks from the perspective of the overall management level of banks, and few articles focus on the risk management ability of banks. This paper evaluates the technical efficiencies of Chinese commercial banks’ risk management by the DEA-BCC model with window analysis to come up with some recommendations for policy makers. The technical efficiency is then decomposed into pure technology efficiency and scale efficiency. According to the banking risk supervision indicators released by the China Banking Regulatory Commission, we choose the indicators of 26 commercial banks’ risk management during the period of 2011 to 2019. Principal component analysis (PCA) is applied to delete redundant input indicators. The paper gives a dynamic evaluation of technology efficiency, pure technology efficiency, and scale efficiency. The main empirical results are as follows: (1) the technical efficiency of Chinese commercial banks’ risk management is low, and the differences among three different types of banks are large. (2) The pure technology inefficiency of Chinese commercial banks’ risk management has become a key factor restricting the improvement of the risk management of the Chinese banking industry. (3) The Chinese commercial banks’ risk management faces a serious problem which is economies of scale. (4) The technical efficiencies of Chinese commercial banks’ risk management fluctuate greatly, and management capabilities need to be enhanced urgently.

Financial inclusion and bank risk-taking nexus: evidence from China

PurposeThis study aims to investigate the relationship between financial inclusion and risk-taking by Chinese banks.Design/methodology/approachIt uses the panel data from Chinese banks ranging from 2011 to 2019 and applies system generalized method of moments to measure coefficients. To get in-depth understanding of the relationship between above-mentioned variables, the analysis for commercial, cooperative, listed, unlisted, small and large banks has been done. Financial inclusion index has been measured based on demographic and geographic aspects by using the principal component analysis, and bank risk-taking has been proxied by z-score.FindingsThe findings reveal an inverse relationship between financial inclusion and bank risk-taking which implies that an increase in financial inclusion results in lesser risk for the banks, i.e. diversification hypothesis applies. However, the results for unlisted and large banks show a different story where an increase in financial inclusion results in higher bank risk and vice versa.Originality/valueThe present study offers several valid and convincing implications for consumers, policymakers and banking sector regulators.

Interaction between wealth management products and bank deposits: evidence from China's shadow banking

PurposeShadow banking has been evolving rapidly in China, with banks actively using wealth management products (WMPs) to evade regulatory restrictions. These products are the largest constituent of China's shadow banking sector. A large number of these products are off-balance-sheet and considered a substitute for bank deposits. China's banking sector, especially the small and medium-sized banks (SMBs), uses these products to avoid regulatory restrictions and sustainability risk in the deposit market.Design/methodology/approachThis study empirically examined how banks in China, specifically SMBs, utilize these products on a short and long-run basis to manage and control their deposit levels. This study utilized a quarterly panel dataset from 2010 to 2019 for the top 30 Chinese banks, by first implementing a Panel ARDL-PMG model. For cross-sectional dependence, this study further executed a cross-sectional augmented autoregressive distributive lag model (CS-ARDL).FindingsUnder regulations avoidance theory, the findings revealed that WMPs and deposits have a stable long-run substitute relationship. Furthermore, the WMP–Deposit substitute relationship was only significant and consistent for SMBs, but not for large four banks. The findings further revealed that the WMP–Deposit substitute relationship existed, even after the removal of the deposit rate limit imposed by the People's Bank of China (PBOC) to control the deposit rates.Research limitations/implicationsThe individual bank-issued WMPs' amount data is not available in any database. Therefore, this study utilized the number of WMPs as a proxy for China's banking sector's exposure to the wealth management business.Practical implicationsThis research helps policymakers to understand the Deposit–WMP relationship from the off-balance-sheet perspective. During the various stages of interest rate liberalization, banks were given more control to establish their deposit and loan interest rates. However, the deposit rates are still way below the WMP returns, making WMPs more competitive. This research suggests that policymakers should formulate a more balanced strategy regarding deposit rates and WMPs returns.Originality/valueThis study contributes to the existing literature on China's shadow banking by concentrating on the WMPs. This research represents one of the few studies that analyze regulatory arbitrage in terms of the WMP–Deposit relationship. Moreover, the implementation of CS-ARDL panel data models and multiple data sources makes this study's findings more reliable and significant.

Risk, competition, efficiency and its interrelationships: evidence from the Chinese banking industry

PurposeThis study investigates the interrelationships between efficiency, competition and risk in the Chinese banking industry.Design/methodology/approachParametric stochastic frontier analysis is used to estimate bank efficiency; the Lerner index is used as the competition indicator; accounting ratios and a translog function are used to measure different types of risk and finally, the three-stage least square estimator is used to investigate the interrelationships.FindingsThe results of this study show that the impact of competition on different types of risk is significant and positive, while there is a significant and positive impact of credit risk, liquidity risk and capital risk on bank competition. In addition, the findings demonstrate that the interrelationships between efficiency and competition are significant and negative. The authors do not find any robust interrelationships between different types of risk and different types of efficiency; the authors find that diversification and higher levels of profitability reduce bank credit risk. The results suggest that a higher developed banking sector reduces the level of bank competition in China.Originality/valueThis is the first piece of research that comprehensively investigates the interrelationships between different types of risk, competition and different efficiencies in China.

The Digitalization Transformation of Commercial Banks and Its Impact on Sustainable Efficiency Improvements through Investment in Science and Technology

The COVID-19 epidemic has accelerated the digital economy’s pervasiveness throughout the Chinese economy, leading to a sharp rise in demand for “contactless” services in the financial industry. We examine the digital transformation of the Chinese banking industry using the DEA–Malmquist index method, supplemented by a distance function and time to compare the dynamic changes of productivity. Our paper then conducts an empirical study on the digital transformation of Chinese commercial banks based on their improvements in efficiency. We analyze banks with superior efficiency in science and technology investment and evaluate their digital maturity and digital transformation experience. Results show that digitalization investment has contributed to substantial production efficiency improvement for commercial banks; however, heterogeneity exists across banks. We further advocate a path for banks’ digital transformation based on theoretical research and empirical digital transformation experience in this area.

Interbank Network Reconstruction Based on Local Clustering Features

Accurately reconstructing the interbank network is the primary task of carrying out research on systemic risks in banks. The empirical study found that the minimum density method underestimated the density of the real interbank network and could not reproduce its core-periphery structure. This paper proposes an interbank network reconstruction method that integrates local clustering features. By introducing a local enhancement matrix, the probability matrix of the minimum density method is modified to enhance the connection tendency among core banks. Furthermore, the adaptive factor method is introduced to distribute the weights of the interbank relationship reconstruction process, so as to establish a low-density interbank network with local clustering characteristics. The experimental results on the 2018 annual report data set of 272 Chinese banks show that, compared with the unintegrated interbank network, the interbank network integrated with the local clustering network has increased by 83.9% and 60.1% in terms of density of core bank’s and average clustering coefficient. Moreover, the reconstructed interbank network has empirical network structure characteristics such as sparsity, disassortativity and scale-free properties.

A Rising Tide Lifts All Boats: Influencing Mechanism of Rising Housing Prices on Corporate Financial Business

Entrusted loans reflect the “siphon effect” of the virtual economy on the real economy, which affects the allocation efficiency of financial resources and the high-quality development of the whole economy. Entrusted loans are one of the important components of shadow banking in China. Enterprises engaged in entrusted loan business is based on their own and market environment to make decisions. To provide the in-depth understanding of the logic behind the supply of entrusted loans and help to formulate economic policies, this paper examines the market factors that drive enterprises to issue entrusted loans. It first makes a theoretical comparative analysis of the changes of non-financial corporate entity investment income and financial investment income caused by the rise of housing prices. Then, using the manually collected transaction data disclosed in the entrusting loan announcements issued by A-share listed companies in Shanghai and Shenzhen Stock Exchanges and the sales price data of commercial housing in prefectural-level cities during 2007−2015, this paper empirically tests the impact of housing prices on non-financial enterprises engaging in entrusted loan financial business and its mechanism path. It is found that the housing price in the city where the loan enterprise is located increases the probability and quantity of entrusted loans issued by local enterprises. The entrusted loans interest rate is negatively correlated with the housing price in the city where the loan enterprise is located, but positively correlated with the housing price in the city where the borrowing enterprise is located. Further analysis shows that: First, “housing prices go up → corporate profitability falls → the amount of entrusted loans issued by enterprises increases” constitutes a transmission path for housing prices to influence enterprises to issue entrusted loans. Second, enterprises with more investment property assets issue more entrusted loans during the period of rising housing prices. Third, more entrusted loans flow to real estate enterprises during the period of rising housing prices. The above results show that the increase in business costs, the appreciation of real estate mortgage assets, and the high yields of the real estate industry, together boost the development of corporate financial business represented by enterprise entrusted loans.The contributions of this paper mainly include three aspects: First, it studies the entrusted loan behavior of enterprises from the perspective of housing prices, which proves that high housing prices increase the proportion of financial assets in the total assets of enterprises, and cause the distortion of non-financial enterprise entity investment and financial investment. Second, it discusses the influence of the real estate industry from the field of informal finance, which provides empirical evidence for the influence of high housing prices on the allocation of financial resources, helps to fully understand the influence of the real estate industry on all areas of the national economy, and expands the field of real estate economics. Third, it discusses the influencing mechanism of housing prices on the entrusted loans of enterprises, and proves that the rapid rise of housing prices will affect the financial investment behavior of enterprises by increasing the operating burden of enterprises and accelerating the flow of funds from the real economy to the real estate industry. In general, there is a linkage effect between entity enterprises, real estate industries and the shadow banking represented by entrusted loans, which suggests that government departments should be committed to slowly absorbing the bubbles in the real estate economy through the accelerated development of the real economy and the macro-control of the virtual economy.

The impact of CoCo bonds on systemic risk considering liquidity risk

This paper investigates the impact of Contingent Convertible (CoCo) bonds on systemic risk in terms of liquidity risk. We compare the differences in default contagion and clearing payments for financial systems with and without CoCo bonds regarding their network and liquidity channels. By analyzing the sensitivity of equilibrium payments and the market price of illiquid assets, we find that CoCo bonds affect the performance of intervention policies by changing the banking system's relative liability matrix and illiquid assets prices. Finally, we illustrate our model using 15 Chinese banks’ annual data in 2017. Results show that CoCo bonds can enhance the risk resilience of issuing banks, but the defaults of issuing banks will lead to systemically broad contagion when an external shock is too large.

OUTWARD FOREIGN DIRECT INVESTMENT OF CHINA’S BANKING SECTOR: DETERMINANTS AND MOTIVATIONS

The outward foreign direct investment (OFDI) is vital for the sustainable development of China’s banking sector. This paper examines the location determinants of OFDI by China’s banks during 2003–2015 with a set of negative binomial panel regression models. We show that the OFDI for China’s banking sector generally exhibits market-seeking, resource-seeking and efficiency-seeking motivations. The efficiency-seeking motivation is mostly through the incentive to avert credit risk. The OFDI also tends to flow to economically stable countries. Our results indicate that the Chinese banks’ investment decisions are mainly in line with fundamental theories and are robust for different samples and periods.

A novel profit cutting mechanism for Chinese Banks: Theory and Multi-dimensional evidence

As China’s macroeconomic growth faces increasing pressure from the global COVID-19 pandemic, a surprising and politically controversial phenomenon has emerged: the profitability of banks in China exceeded that of enterprises and non-financial industries. The People’s Bank of China and regulatory authorities have hence taken measures to incentivize banks to transfer part of their profits to enterprises, with the aim to stabilize enterprises and employment. This paper proposes a novel profit cutting mechanism focusing on loan structure adjustments to address the limitations of the current approach centering on lowering loan interest rates. The theoretical and empirical analysis show, at both the macro and micro level, that an increase in the proportion of credit loans can benefit the development of enterprises without weakening banks’ operating performance in the long term, leading to a Pareto improvement within enterprise-banking sectors. The findings suggest that banks in China should gradually adjust their loan structures by providing greater credit loan access to enterprises, either voluntarily or directed by policy.

Are Foreign Banks Disadvantaged Vis-À-Vis Domestic Banks in China?

Do foreign banks enjoy a competitive edge in the Chinese banking market or are they disadvantaged vis-à-vis domestic banks? This is the question that the present paper seeks to answer. The issue is important since on the one hand, these banks face the challenges the liability of foreignness brings, but at the same time, they have bank-specific advantages. We examine this issue in light of the literature of the liability of foreignness. In our path-breaking study, we found that due to the cost of foreignness, foreign banks’ performance was not as good as that of the local banks. Furthermore, despite the same amount of location- and bank-specific advantages, they performed badly as compared to their local counterparts. It was found that the cost of location-based disadvantages outweighed the cost of bank-specific disadvantages for foreign banks, and recent policy changes may help them overcome some of the cost of foreignness.

Determinants Affecting Profitability of State-Owned Commercial Banks: Case Study of China

The study examines the relationship between internal determinants, external determinants and the profitability of state-owned commercial banks. We use pooled regression, fixed effect, and random effect models on the case of the top five Chinese state-owned commercial banks from 2007 to 2019. The results show that internal factors, measured by size, credit quality, and liquidity, significantly positively influence banks’ profitability. State-owned banks that have larger sizes, higher credit quality, and higher liquidity have accordingly higher profitability than other banks. On the contrary, the external factor, measured by the natural logarithm of GDP, negatively influences banks’ profitability. The decrease in GDP leads to higher profitability of state-owned commercial banks in China. Our results provide insight into the profitability of state-owned commercial banks, considering the latest changes in the Chinese banking industry.