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Quantitative Finance and Economics

2025, Volume 9, Issue 4: 832-852. doi: 10.3934/QFE.2025029
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Research article

Banking market structure, lending behavior, and profitability in China

  • 1.
    International College of Liberal Arts, Yamanashi Gakuin University, 2-4-5 Sakaori, Kofu, Yamanashi, Japan
  • 2.
    Department of Business and Economics, International Christian University, 3-10-2 Osawa, Mitaka, Tokyo, Japan
  • Published: 06 November 2025

  • JEL Codes: G20, G21

  • Bank competition is complex because it occurs simultaneously in deposit markets and loan markets. Most governments regulate the banking industry more than other private-sector industries, and some intervene in the banking industry in ways that would be unthinkable in other sectors of the economy. These features of the banking market sector result in characteristics that vary substantially across countries, with bank behavior and decision-making highly dependent on local conditions. Banks also play an important role in policy transmission and economic development, which makes understanding banking market structures and their influence crucial. This study examines banking market structure and the influence of market power on bank behavior in a highly regulated environment—the Chinese market. Using financial report data, this research analyzes how market structure and power affect profitability and lending decisions. The results show that, as in many other banking markets, concentration in the lending market contributes positively to profitability by increasing loan rates, while deposit markets experience lower deposit rates in more concentrated settings. However, market power in China exhibits different competitive features compared with other countries. Banks compete on loan quality by offering lower loan rates, relying on higher leverage, and reducing bad debt to generate greater profits, rather than maximizing profits through higher loan rates when they hold more market power. Smaller banks, however, cannot compete in this way because a larger scale is required to cover monitoring and operating costs. For smaller banks, such strategies are infeasible, forcing them to charge sufficiently high loan rates to generate enough profit to cover operating expenses.

    Citation: Dachen Sheng, Heather A. Montgomery. Banking market structure, lending behavior, and profitability in China[J]. Quantitative Finance and Economics, 2025, 9(4): 832-852. doi: 10.3934/QFE.2025029

    Related Papers:

  • Bank competition is complex because it occurs simultaneously in deposit markets and loan markets. Most governments regulate the banking industry more than other private-sector industries, and some intervene in the banking industry in ways that would be unthinkable in other sectors of the economy. These features of the banking market sector result in characteristics that vary substantially across countries, with bank behavior and decision-making highly dependent on local conditions. Banks also play an important role in policy transmission and economic development, which makes understanding banking market structures and their influence crucial. This study examines banking market structure and the influence of market power on bank behavior in a highly regulated environment—the Chinese market. Using financial report data, this research analyzes how market structure and power affect profitability and lending decisions. The results show that, as in many other banking markets, concentration in the lending market contributes positively to profitability by increasing loan rates, while deposit markets experience lower deposit rates in more concentrated settings. However, market power in China exhibits different competitive features compared with other countries. Banks compete on loan quality by offering lower loan rates, relying on higher leverage, and reducing bad debt to generate greater profits, rather than maximizing profits through higher loan rates when they hold more market power. Smaller banks, however, cannot compete in this way because a larger scale is required to cover monitoring and operating costs. For smaller banks, such strategies are infeasible, forcing them to charge sufficiently high loan rates to generate enough profit to cover operating expenses.



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