A novel profit cutting mechanism for Chinese Banks: Theory and Multi-dimensional evidence

Chao Guan, Bo Yu and Sheng Bi

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

Abstract: As China’s macroeconomic growth faces increasing pressure from the global COVID-19 pandemic, a surprising and politically controversial phenomenon has emerged: the profitability of banks in China exceeded that of enterprises and non-financial industries. The People’s Bank of China and regulatory authorities have hence taken measures to incentivize banks to transfer part of their profits to enterprises, with the aim to stabilize enterprises and employment. This paper proposes a novel profit cutting mechanism focusing on loan structure adjustments to address the limitations of the current approach centering on lowering loan interest rates. The theoretical and empirical analysis show, at both the macro and micro level, that an increase in the proportion of credit loans can benefit the development of enterprises without weakening banks’ operating performance in the long term, leading to a Pareto improvement within enterprise-banking sectors. The findings suggest that banks in China should gradually adjust their loan structures by providing greater credit loan access to enterprises, either voluntarily or directed by policy.

Keywords: Profit Cutting by Banks; Profit Cutting Mechanism; COVID-19 Pandemic; Loan Interest Rate; Loan Structure; Credit Loans (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001522

DOI: 10.1016/j.najef.2021.101541

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