4. The performance of China’s stateowned banks INTRODUCTION This chapter considers the economic development implications of the SOBs’ lending. Since 1995, China’s SOBs have been labeled as commercial banks in ofﬁcial statistical publications and Chinese law. The behavior of a commercial bank in a purely market economy is dictated by its optimization problem, that being, to maximize expected proﬁts subject to a risk constraint (Santeromo, 1984, p. 580). This objective function means that loans, for example, will be allocated to those projects that offer the highest expected rate of ﬁnancial return. Commercial banks will also diversify their loan portfolios and maintain a strong capital base to more effectively manage risk. Given these objectives, the performance of a commercial bank can largely be determined by examining its balance sheet and calculating measures of ﬁnancial return such as proﬁtability, and measures of solvency such as capital adequacy. This has become the standard approach to evaluating the performance of China’s SOBs in both academic circles and the mainstream press (Lardy, 1998a, pp. 76–127). The proﬁtability of SOBs has declined markedly since the mid-1980s when they were amongst the most proﬁtable in the world (Girardin, 1997, p. 32). Their pre-tax proﬁt/asset ratio dropped from 1.4 percent in 1985 to just 0.2 percent in 2000 (Lardy, 1998a, pp. 93; The Banker, July 2001, p. 164). In a survey of the world’s 1000 largest commercial banks taken at year-end 2000, the four largest SOBs, Industrial and Commercial Bank of...
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