{
  "title": "Does Good Financial Performance Mean Good Financial Intermediation in China?",
  "publication": "IMF Working Papers, August 1, 2009",
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  "summary": "Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources.",
  "sections": [
    {
      "heading": "Main findings",
      "content": "- Chinese banks generate large profits and have relatively low nonperforming loans.\n- Good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources.\n- The results suggest that Chinese banks became more efficient during 2001-07.\n- Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks.\n- The paper finds no significant correlation between bank efficiency and profitability.\n- Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies:\n  - low deposit interest rates\n  - large interest margins\n  - high market concentration"
    },
    {
      "heading": "Efficiency analysis and methodology",
      "content": "- Approach: stochastic production frontier approach.\n- Loan quality controls:\n  - focus on net loans\n  - corrections for nonperforming loans\n- Sample design:\n  - Hong Kong SAR banks are included in the sample to have a more universally representative production frontier."
    },
    {
      "heading": "Scale, deposit behavior, and implications for reallocation",
      "content": "- Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale.\n- Smaller banks operate at increasing returns to scale.\n- Policy implication: reallocating deposits from large to smaller banks would increase overall efficiency."
    },
    {
      "heading": "Profitability versus intermediation efficiency",
      "content": "- No significant correlation found between bank efficiency and profitability.\n- Large profits can coexist with wide-spread inefficiencies due to the factors listed above (low deposit rates, large margins, market concentration)."
    },
    {
      "heading": "Policy recommendations and risks",
      "content": "- Move to indirect monetary policy.\n- Deepen capital markets to channel some of the savings to productive investment.\n- Note: deepening capital markets and shifting intermediation could spur loan growth, which will need to be handled with monetary policy and regulatory/supervisory tools.\n\n---\n\n Content in this bundle\n\n- wp09170\n  - wp09170 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp09170 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/does-good-financial-performance-mean-good-financial-intermediation-in-china-23174"
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    "Authors: Tarhan Feyzioglu",
    "Published: August 1, 2009",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451873177.001",
    "Chinese banks generate large profits and have relatively low nonperforming loans.",
    "Good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources.",
    "The results suggest that Chinese banks became more efficient during 2001-07.",
    "Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks.",
    "The paper finds no significant correlation between bank efficiency and profitability.",
    "Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies:",
    "Approach: stochastic production frontier approach.",
    "Loan quality controls:",
    "Sample design:",
    "Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale.",
    "Smaller banks operate at increasing returns to scale.",
    "Policy implication: reallocating deposits from large to smaller banks would increase overall efficiency.",
    "No significant correlation found between bank efficiency and profitability.",
    "Large profits can coexist with wide-spread inefficiencies due to the factors listed above (low deposit rates, large margins, market concentration).",
    "Move to indirect monetary policy.",
    "Deepen capital markets to channel some of the savings to productive investment.",
    "Note: deepening capital markets and shifting intermediation could spur loan growth, which will need to be handled with monetary policy and regulatory/supervisory tools.",
    "**_wp09170**"
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