Review of Quantitative Finance and Accounting, 16, 149–170, 2001
2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Comparative Performance of Chinese Commercial
Banks: Analysis, Findings and Policy Implications
SHANLING LI, FENG LIU,
SUGE LIU, AND G. A. WHITMORE
Faculty of Management, McGill University, Montreal, Canada
Abstract. This paper investigates the ﬁnancial performance of Chinese banks by using ﬁnancial ratio analysis.
The analysis shows that the low proﬁtability of state-owned commercial banks results from their higher ratio
for non-interest expenses and lower interest margin than joint-equity banks. The much lower proﬁt margin in
state-owned banks draws down their levels of ROE and ROA, even with the offsetting effects of more efﬁcient
utilization of their assets and higher ﬁnancial leverage. Although data limitations prevent us from studying the risk
proﬁles of the banks in detail, it is clear that these Chinese banks generated lower returns with higher ﬁnancial risks
than their Western counterparts. The paper concludes with a discussion of major issues affecting Chinese bank
performance. Signiﬁcant difﬁculties encountered in assessing bank performance are also identiﬁed and discussed.
Key words: accounting, banks, banking sector, China, comparative performance, ﬁnancial analysis, ﬁnancial
reporting, policy implications
JEL Classiﬁcation: G21
1. Introduction and motivation for the study
The role of the banking sector in the Chinese economy has increased dramatically. Bank re-
formshave played animportant role in thedevelopment of leadingindustries, the agricultural
sector and international trade. Bank loans accounted for 77% of Chinese corporate ﬁnancing
in 1997 and 83% in 1998. The aggregate assets of banking institutions increased by 13.3%
in 1997. The aggregate assets of commercial banks reached 10.75 trillion RMB (renminbi)
at the end of 1997, an increase of 12% from the previous year. The state-owned commercial
banks as a group continue to have a dominant share of the commercial banking business,
accounting for about 60% of the aggregate assets of all ﬁnancial institutions. Commercial
operations and management have been enhanced on many fronts. Joint-equity banks are an
emerging force among commercial banks. They operate entirely on a commercial basis.
The increasingly important economic and ﬁnancial role that China is playing and will
play in the world leads us to be interested in the development of the banking sector in China.
Progress in the banking industry motivates us to study the performance of Chinese banks.
Section 2 describes the on-going development of the Chinese banking system; Section 3
describes the nature, sources and limitations of the data that we have gathered for our study
of bank performance. Section 4 presents a ﬁnancial analysis of performance. Section 5
Corresponding author: Feng Liu, Faculty of Management, McGill University, 1001 Sherbrooke St. West,
Montreal, Quebec, Canada, H3A 1G5, Fax: (514) 398-6773, E-mail: email@example.com