Study Of China's Commercial Banks Performance Based On Ownership And Competition

According to the Global bank rankings in 2010, China has three banks among the world's top ten, namely Industrial and Commercial Bank of China (ICBC), China Construction Bank and Bank of China. Among them, ICBC's net profit in 2010 was 325 billion U.S. dollars, known as "the world's most profitable bank."However, behind these remarkable achievements, in fact, hidden systematic risk in China's banking industry cannot be underestimated, and there is still a big gap of profitability and competitiveness compared with the developed countries'commercial banks. In response to the increasingly complex financial innovation and competitive environment, it is of great significance to study how to improve the performance and international competitiveness of the China's banking sector.In this paper, we begin with an analysis of the source of China's commercial banks high profits, and we also make a comparative analysis on the commercial banks'performance between USA and China, on the base of which we find the remained problems in China's commercial banks profit model. Then we put forward the necessity of our study.The main line through the whole article is the relationship between property rights, competition and bank performance. Firstly we give a theoretical deductive analysis of the relationship among banking competition, property rights arrangements and the performance of commercial banks. Based on the theoretical study we make an empirical test of China's banking data. It is found that China's commercial banks are too dependent on net interest margin as the main source of income, so the high profit is unsustainable. Another conclusion is that the monopoly state-owned large commercial banks co-exist with the operation of low efficiency.Under China's current banking operating conditions, the property ownership is the most important factor leading to poor performance of China's commercial banks. The unique system of property rights arrangements inhibits effective competition's formation in China's banking sector, meanwhile lead to diseconomies of scale and poor performance. Finally, from the market structure reform and the reform of ownership structure we put forward policy proposals on how to change China's banking industry profit model and how to improve banking performance.This paper is divided into seven chapters. Chapterâ… is the introduction. In this chapter we discuss the practical significance of study on China's commercial banks' performance, followed by an overview of the research method, innovation and research framework. At last we give a brief overview of the previous research from three aspects--market structure, ownership structure and economies of scale and scope.In chapterâ…¡, we first introduce the T commercial banks'evaluation system, which includes indicators of profitability, liquidity and safety. Factors affecting the performance of commercial banks are divided into macro, meso and micro levels. Meso and micro factors are the focus of our study. Meso and micro levels of study on commercial bank performance is based primarily on industrial organization theory and property rights theory. In this chapter we describe these relevant theories, which is the basis for the analysis of subsequent chapters.In chapterâ…¢we give a detailed analysis of the sources of China's commercial banks profits, through which we discuss the remained problems with the profit model in China's banking sector. From the view of banking franchise value we conclude that the high profits of China's banking industry lie in the big net interest margin and the state-owned commercial banks'monopoly position in deposit and loan market.Compared with developed countries'commercial banks, China's commercial banks are too dependent on deposit and lending spreads as sources of income, the asset allocation and income structure is not diversified. China's commercial banks' profit-making model is clearly unsustainable because of deregulation on interest rate.In chapterâ…£, we mainly discuss the effect of competition on commercial banks performance. In this chapter we first discuss the standard competitive model of industrial organization. According to the traditional theory of industrial organization, competition in any industry is beneficial. Application of the theory of industrial organization to the banking sector studies suggests that banking sector also needs a lot of banks to ensure competition and efficiency. In this chapter we also introduce another model to prove some limitations of competition. We conclude that excessive competition will encourage banks to engage in high-risk investment. In addition, we also make a comparative analysis on the efficiency of unit banking system and sub-branch system. It is found the sub-branch system is more efficient. Overall, for theoretical studies of the banking sector concentration and competition, we don't get a consistent conclusion.In chapterâ…¤, we use the principal-agent relationship model to analyze the relationship between property and operational efficiency for state-owned banks. Theoretical model's results show that the cultivation of state-owned commercial banks by market dominant position, establishment of an effective incentive mechanism, and the introduction of the new individual investors can improve the efficiency of state-owned commercial banks. In most of the Western nations, the commercial banks experienced the process of privatization. Property rights reform of the national bank of the West also proved inefficiency of state-owned property rights and diversified ownership structure helped to improve banking performance.Chapterâ…¥is the relevant empirical test of theoretical analysis in the previous sections. By using China's commercial banks data from 2003 to 2010 we make empirical analysis as follows:the first is the comparative study of performance of different kinds of China's commercial banks; the second is the empirical study of the market structure of the banking sector; the third is empirical research to check the relationship of commercial banks'IPO and operation performance; the forth is to examine the relationship of comprehensive factors and commercial banks' performance.In Chapterâ…¦we draw conclusions and propose countermeasures on the previous chapters. This paper argues that China's banking industry has a profit model which is not sustainable. The market structure of China's banking sector is monopoly accompanied with competition. The state-owned banks which are in monopoly position have low operation efficiency. The main problem is not monopoly itself, but the property ownership arrangement. It is the state-owned property ownership that leads to poor performance of China's commercial banks. Finally, policy proposals are given on how to improve China's commercial banks business performance.