Research on the Relationship between Competition and Profitabilityin the Chinese Banking Sector.docVIP

Research on the Relationship between Competition and Profitabilityin the Chinese Banking Sector 　　Abstract 　　This study seeks to analyze the relationship between competition and profitability in the Chinese banking system. In term of empirical analysis， this study uses the bank-level data for Chinese commercial banks over the period 2004-2011. Both the concentration ratio and the Panzar-Rosse model are used to measure the intensity of competition in the Chinese banking sector. An empirical model is established to examine the link between competition and concentration using the concentration ratio as a proxy of the degree of competition. The findings from this study suggest that the Chinese banking market is in a state of monopolistic competition and the market shares controlled by the four state-owned banks have declined. Moreover， in contrast with the traditional view that this is a positive relationship， this study indicates a negative relationship between concentration and profitability in the Chinese banking system， suggesting a positive relationship between competition and profitability. 　　1 Introduction 　　Along with the trend in consolidation in financial sectors in recent years， the economic role of competition in banking attracts a larger number of studies. As in other industries， competition in the banking industry is also important because it has an impact on efficiency， pricing， innovation and the welfare of customers， as well as on resource allocation in economies. Different approaches have been used in the studies of the influence of competition in the banking sector. The majority of studies focus on its impact on efficiency， stability and profitability， and the conclusions of these studies are mixed. 　　2 Literature review 　　2.1 Theory on the relationship between competition and profitability 　　The analysis of banking competition and performance is primarily based on Industrial Organization economics， including structure methods based on Trad