China's Commercial Banks Performance (Dissertation Sample)

China's Commercial Banks Performance Shen jin yi lei Student number：099998789 Tutor: Philp Dodds Date of Submission: Declaration ‘No component of the work referred to in this project has been submitted in support of any application for another qualification for this or any other University or Institute of Learning' Abstract In the recent past, the Chinese banking system has been going through constant reforms that have effectively opened up the sector from exclusive state ownership to a more liberal industry. Such reforms include government liberalization to private and foreign ownership, initial public listing in the stock exchange, diversifications of bank services beyond the loan and deposit services. It can be said that these reforms have been for good of the Chinese banking system. The altering of structures in this industry coupled with China's relatively favorable economic climate over the past few years have fostered a great deal the development of commercial banks. In this research, I collect sample data from eighty commercial banks from the country between the years 2000 and 2008 and analyse their performance. The overall index performance measures are analyzed using the proxy variables that determine the quality of liquidity, profitability, capital adequacy and assets. Useful determinants at different levels (banking, industry and macroeconomic) are also analyzed in panel statistical models. The research found out that the city commercial banks perform better than the country's national banks including the big four state-owned and other joint stock banks. This analysis also suggests that relatively higher out-of-balance sheet undertakings, less financial leverage and larger bank size lead to better performance. At the industry level, the concentration of banks has led to better performance probably as a result of lower competition. The accommodation of foreign banks since 2003 has also boosted the banking industry. Finally, at the macroeconomic level, the country's high per capita GDP can also be said to have led to better performance. This research offers a good evaluation of Chinese banks performances and can be used to predict the future of the industry. It's a wonderful tool for stakeholders, investors and all enthusiasts interested in the Chinese banking system. Keywords: Commercial bank performance, liberalization, China banking reforms Acknowledgement This dissertation is dedicated to my lovely parents and family that have given me the courage and support all through my academic life. This final report is as much as their effort as it is mine. I would like to thank my personal tutor, Dodds, for his timely and valuable advice during the research process. Finally, I thank my classmates for the encouragement. My gratitude to you all cannot be quantified. TABLE OF CONTENTS Abstract…………………………………………………………………………………....2 Acknowledgement………………………………………………………………………....4 Chapter 1…………………………………………………………………………………...6 Introduction………………………………………………………………………...6 Research question………………………………………………………………….9 Research Objectives………………………………………………………………..9 Rationale of research……………………………………………………………...10 Chapter 2………………………………………………………………………………….11 Literature Review…………………………………………………………………11 Chapter 3………………………………………………………………………………….19 Indicators of Bank Performance………………………………………………….19 Chapter 4………………………………………………………………………………….26 Key Determinants of Performance……………………………………………….26 Chapter 5………………………………………………………………………………….32 Research Methods………………………………………………………………...32 Chapter 6………………………………………………………………………………….38 Results and Tables………………………………………………………………..38 Chapter 7……………………………………………………………………………….…44 Analysis and Discussion………………………………………………………….44 Recommendations………………………………………………………………...47 Conclusion………………………………………………………………………………...48 Bibliography………………………………………………………………………………49 CHAPTER 1 1 INTRODUCTION China has experienced a series of economic transitions over the past years. However, it can be argued that the Chinese government only embarked on extensive financial reforms from around 1980. At the time, the focus was solely on institutional reforms that touched on the country's banking system. For instance, there was a shift from a single bank where the People's Bank of China took on multi tasks (commercial bank, government treasury as well as supervisor) to a double level banking system when the big four (until recently state owned) specialized banks were integrated into the system (Shirai 2002; Cousin 2007). The People's Bank of China retained its status as the central bank. On the other hand, the commercial operations were divided among four banks; the China Construction Bank (CCB), the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China (ABC) and Bank of China (BOC). These have affectionately been called the big four over the years. The year 1994 also witnessed an extensive wave of reforms in the Chinese banking system. First and foremost, there were commercialization efforts of the aforementioned big four. For instance, commercial as well as policy lending were separated leading to the establishment of three policy banks that took over the role of policy lending (Cousin 2007; Brean 2007; Yao et al 2007; Shirai 2002). A year later, the Commercial Bank Law was enacted. This law acknowledged the fact that the state owned big four (which were specialized) were indeed commercial banks. It went ahead to define the previously ambiguous business scope for the banks (Zhong 2007; Cousin 2007; Brean 2007). However, the Asian region was hit by a dire financial crisis late in the 20th century. The Chinese government instigated further banking reforms of the banks. Such reforms included the issuing of a decade long bond to raise new capital (Garcia-Herreroa et al 2009). Other reforms included the establishment of four asset management companies that transferred non performing loans from the state owned banks at face value (Yao et al 2007; Cousin 2007; Garcia-Herreroa et al 2009) and the promulgation of prudential accounting systems and a corresponding loan classification system (Li...