Bank profitability and inflation: the case of China

This study examines the determinants of bank profitability in China over the period 2003-2009. The determinants are divided into three groups: bank-specific, industry-specific and macroeconomic variables. The two-step General Method of Moments (GMM) system estimator is used. The results show that there is a positive relationship between bank profitability, cost efficiency, banking sector development, stock market development and inflation. We report that low profitability can be explained by higher volume of non-traditional activity and higher taxation. Moreover, we confirm that there is a competitive environment in Chinese banking industry. Furthermore, we propose policy actions that should be taken to improve bank profitability in China.