Study On Factors Affecting The High Profitability Of Chinese Banks

In recent years, with the rapid development of Chinese banking sector, theperformance of the “big four” Chinese state-owned banks are more eye-catching. Inaddition, they led the global banking ranking according to the Banker ranking.Chinese banks were weak in the past. In sharp contrast, by way of the years of reformwith the new capital injection and the bad assets carve-outs, Chinese banking sectorhas a new look for its restructuring. Withstanding the impact of the Asian financialcrisis and the global financial crisis in the reform process, the profitability of Chinesebanks agreed to maintain good posture. However, many articles have pointed out thatthe low efficiency of Chinese banks is still persistent. The contradiction of lowefficiency and high profitability aroused interest of many researchers to studyChinese banking sector. This paper aims to study the sources of high profitability ofChinese banking sector, especially of the “big four” Chinese state-owned banks.First, take the comparison method. Put Chinese banks and peer banks of ASEAN,EU and North America together to compare and analyze of the factors which mayhave a more significant impact on banks’ profitability. Then, the “big four” Chinesestate-owned banks as representatives of Chinese banking sector are compared withthe international peer banks under three hypothetical situations.In the first hypothesis, if the marketization of interest rates fully opens in China,which causes the net interest margin of the “big four” Chinese state-owned banksfalls to the international standards, the average return on assets will fall below thelevel of international peers. The results show that the average return on assets of the“big four” Chinese state-owned banks indeed significantly decreased in comparisonwith that before assuming, but still much higher than international standards. Thentest the second hypothesis, which assumes that labor costs increase to theinternational level, with the fist hypothesis, so the average return on assets will fallbelow the international level. The profitability of the “big four” Chinese state-ownedbanks continue to decline, but still higher than the international level. This result may be due to the financial crisis which impacts greater on the large international banks,and the protection of the Chinese market makes less influence on Chinese bankingsector.In order to find out new growth point of profit facing the full liberalization ofChinese banking sector in the future, put forward the hypothesis3. On the basis of theassumption2, if diversification business of the “big four” Chinese state-owned banksreaches to international standards, profitability of them will increase. The resultsshow that the assumption is valid. In other words, deepening the reform of Chineseinterest rates and increasing labor costs gradually, the Chinese banks can change theirbusiness strategy and explore universal business model to make up for losses causedby the decline in interest margin.