What explains the low profitability of Chinese banks?

June 2008


This paper analyzes empirically what explains the low profitability of Chinese banks for the period 1997-2004. As one would expect, better capitalized and more efficient banks are found to be more profitable. Another key factor behind the low profitability is government intervention, as reflected by the negative impact of state ownership. Instead, more market oriented banks tend to be more profitable. These findings should not come as a surprise for a banking system which has long been functioning as a mechanism for transferring huge savings to meet public policy goals. The ongoing reform should ensure that government intervention is the banking system is reduced -by lowering the share of government ownership, improving the corporate culture and fully liberalizing the financial system.