Stability and profitability in the Chinese banking industry: evidence from an auto-regressive-distributed linear specification

The important role played by the Chinese commercial banks in the development of China’s economy has made the government and banking regulatory authority concerned about the performance of these banks.Indeedthe stability of the banking sector has attracted greater attention since the financial crisis of 2007-2009. The principal objective of this study is to investigate the inter-relationships between profitability and stability in the Chinese banking industry. Using a sample of Chinese commercial banks over the period 2003-2013, the study examines the inter-relationships under an auto-regressive-distributed linear model. Both Z-score and stability inefficiency were used as measures of stability, while Return on Assets (ROA) was used as the indicator of profitability. Different types of Generalized Method of Moments (GMM) estimators including difference GMM, one-step system GMM, two-step system GMM as well as two-step robust GMM were used. In order to the check the robustness of the results, alternative econometric techniques were used, such as ordinary least square (OLS) estimator, between effect estimator, as well as fixed effect estimator. The results show that higher insolvency risk/lower bank stability leads to higher profitability of Chinese commercial banks and also that higher profitability leads to higher bank fragility.

Keywords: bank profitability, bank risk, China.
JEL classification: G21, C23