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Research Article

Size Does Matter for Profitability! Testing Economies of Scale in Chinese Banking Industry

Shiyong Zhao and Jianhui Jian
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Chinese banking sector has undergone great changes since the mid 1990s. One common feature of Chinese banks is that they all grow larger and more diversified in ownership structure. This study aims to explore the determinants of profitability of Chinese major commercial banks, especially the impact of bank size on bank profitability. Using a panel data set consisting of 87 Chinese major commercial banks over 1998-2011 and regressed with fixed effect models, the study finds that asset size has a statistically significant and positive effect on bank profitability. Specifically, after controlling for other variables, when total assets increase by 1%, net profit per person will increase by 0.48%, return on asset and return on equity will increase by 0.24 and 2.3% points. The finding explains why almost all Chinese commercial banks are trying to growing larger and also explains why most Chinese banks are not willing to serve small and medium-sized enterprises and farmers. This result originates from the monopolized position of Chinese banking sector. This study confirms that there exists significant economies of scale in Chinese banking sector.

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  How to cite this article:

Shiyong Zhao and Jianhui Jian, 2013. Size Does Matter for Profitability! Testing Economies of Scale in Chinese Banking Industry. Journal of Applied Sciences, 13: 3510-3515.

DOI: 10.3923/jas.2013.3510.3515


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