The Impact of Business Cycles on the Profitability of Chinese Commercial Banks

Abstract: Chinese commercial banks are the leading players directly participating in China's market economy activities. Macroeconomic stability is an essential prerequisite for the development of the banking industry. However, with the development of economic globalization, more and more influencing factors determine the changes in the business cycles, thus making commercial banks face higher risks in their operations. What's more, policy factors may make the operation of China's commercial banks inconsistent with changes in the business cycles. At present, China's domestic research literature that extends to the operation of commercial banks from the perspective of economic cycles lacks a systematic theoretical analysis. The purpose of the study was to examine the correlation between the profitability of commercial banks and business cycles in China by using the panel data analysis method. This paper selected return on assets, loan growth rate, non-performing loan ratio and net interest spread of 34 listed commercial banks from 2001 to 2018 as related variables and selected GDP growth rate, unemployment rate, and industry value added growth rate of China from 2001 to 2018 as the indicators of business cycles. The findings show that business cycles have a negative effect on the profitability of commercial banks in China. Based on the result of the empirical conclusions and the interest-oriented profit model of Chinese commercial banks, the paper also analyzes the impact of the business cycles on commercial bank profitability from the perspective of loan and net interest spread. Commercial bank practitioners can use these findings to avoid risks in bank operations, while other researchers can use our findings to develop further research on the factors affecting the profitability of commercial banks.