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People's Daily Online>>China Business

Chinese banks' profit model unsustainable

(Chinadaily.com.cn)

16:51, February 22, 2012

The current profit model of China's banks, which brings high profit growth rate by stipulating the cap of deposit rates and floor of lending rates, is unsustainable, the Economic Daily reported Wednesday, citing an industry insider.

Commercial banks in China net a profit of 1.04 trillion yuan ($0.17 trillion) in 2011, rising 36.34 percent year-on-year from 763.7 billion yuan in 2010, according to the latest figures published by China Banking Regulatory Commission. However, the high cost of carry remains the pivotal source of profits, contributing more than 80 percent of total profits in 2011.

The central bank, the People's Bank of China, is slowly loosening the restrictions on deposit and lending rates to tackle inflation, which will result in rising cost of funds and dwindling cost of carry for the banks, said Chen Xian, executive president of the Economics School of Shanghai Jiao Tong University.

But some industry insiders claim that banking reforms, better management and operations should be the top contributor to banks' rapid profit growth. The proportion of profit brought by intermediary businesses has rocketed close to 20 percent in 2011, compared with past single-digit shares, the report said.

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