Tan, Aaron Yong and Floros, Christos (2012) Stock market volatility and bank performance in China. Studies in Economics and Finance, 29 (3). pp. 211-228. ISSN 1086-7376

This paper evaluates the determinants of bank performance in China. In particular, we examine the effects of stock market volatility, competition and ownership on bank performance in China. The sample comprises a total of 11 banks (four state-owned and seven joint-stock commercial banks) listed in the Chinese Stock Exchanges. The period under consideration extends from 2003-2009. The Generalized Methods of Moments (GMM) difference and system estimators are applied. Empirical results show that high level of stock market volatility can translate into higher Return on Equity (ROE) and Excess Return on Equity (EROE). Rather than leading to improved profitability, the labour productivity has a negative impact on Economic Value Added (EVA). Ownership does not have any effect on the profitability of Chinese banking industry. The bank profitability in terms of ROE and EROE is lower in the banking industry with higher competition. When using the GMM with ROE-COC and ROE, we find that high taxation has a negative impact on both state-owned and joint-stock banks, while the capital level is negatively related to joint-stock commercial banks. With regards to the other two performance indicators (EVA and NIM), the result suggests that higher cost efficiency and labour productivity improve the performance of both state-owned and joint-stock commercial banks. Large volume of non-traditional activity is the explanation of poor performance of state-owned commercial banks, while higher credit risk, lower taxation and mature banking industry are helpful in improving the performance of joint-stock commercial banks.

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