Research On Determinants Of Banking Profitability In China

In recent years, the internal and external environments have been undergoing dramatic changes, such as gradual opening up of Chinese banking industry, reform on mechanism of interest rate and exchange rate, implementation of New Basel Capital Accord, and so on. In this case, commercial banks in China are facing a challenging problem: how to increase profit and enhance the profitability of banks, which is a very important question to maintain the banking competitiveness and security of the financial system in our country. However, what kind of factors is the key to the question and how these factors to affect the profitability, research to these questions shall provide us many insights, which is also the original purpose of this dissertation.This article is based on numerous materials of domestic and foreign research already had. It emphasizes the theoretical basis, mainly referring to theory of the economy of scale, industrial structure and organization, the relationship between financial development and economic development. Besides, the variables used in this article are comparing to similar empirical research, taking Chinese specific situation into account and then making proper choice. Due to amount of the samples, it uses a relatively small pool of major variables to insure the accuracy of the research conclusions.This article analyzes and researches the theme in an empirical way, three kinds of factors are considered-bank charictristics, market structure and macroeconomic factors. The methods used in this article include ordinary least square and general least square, besides it applys Hausman test to identify which one is better between the fixed effect model and random effect model. Then it gives a rating list according to the effect. The conclusions are these as following: bank-specific determinants are the major aspect of profitability, market concentration has bigger effect, market share affects much less, and when it comes to macroeconomic determinants, economic growth rate has a relatively bigger effect, while both inflation rate and stock market GDP ratio are not so significant.So, in Chinese banking industry it is much better to take following measures. Commercial banks increase their capital to proper amount, better control the scale and enhance the management efficiency, pay more attention to deceasing non-performing assets and saving cost. At the same time, gradually introducing competition and lowering the barrier to all kinds of capital as long as it is under well-regulated management. In addition, in macroeconomic prospective, the commercial banks should better cultivate the capability to forecast the economic condition and self-pricing ability to offset the negative effect of inflation. So that, commercial banks in our country can increase the profit, the competitiveness will strengthen strongly.