Determinants of Non-Performing Loans in China and the Ownership Effect

This prospectus analyzes the potential determinants of Chinese non-performing loan (NPL) ratio in banking sector and its implications using panel data from different banks in China. By incorporating both bank specific factors and macro variables, it shows domestic credit growth rate, bank profitability measures and bank ownership play important roles in determining NPL ratio. Analysis of proportion of shares of different types of owners shows that increasing percentage of shares controlled by private institutional investors reduces the NPL ratio significantly. In addition, the declining quality of infrastructure loans indicates the side effect of Chinese economic stimulus plan of 2008, and explains the existing performance gap between Chinese state-owned banks and joint-equity banks. This prospectus discovers some evidence of growth disparity in three most prosperous regions in China where varied degrees of economic reform has led to different performance. By measuring IPO and foreign minority ownership event, it also finds the events of IPO and foreign minority ownership alone cannot improve the bank performance. China’s weak corporate governance needs an overhaul to deal with the nepotism towards state-owned enterprises (SOE) and state-owned banks (SOB), which fundamentally distorts the banking sector. Finally, the prospectus anticipates several lines of future research, like how SOE and SOB can be deinstitutionalized; what is the effect of the shadow banking system on financial stability and health; and whether a more developed equity market will help reduce the NPLs as firms have more financing tools to fund their business.