The Determinants of the Bank’s Liquidity Risk in Chinese Commercial Banks
Authors:   Asia-Europe Perspective Association, Lei Yu , Yu Kwanghyun , Bang Sungchul 
Published: June 2018

With China’s accession to the World Trade Organization (WTO), many foreign banks have started to enter into China while Chinese banking and insurance industries have been deepening and opening up. Commercial banks will pay more attention to profit and abandon appropriate liquidity in order to survive in fierce competition. Particularly in recent years, liquidity risk caused by the US sub-prime mortgage crisis has lead banks and many financial institutions to collapse and has also been bringing the devastating impact on the global economy. In 1978, Chinese government began to implement the reform and opening up, and in the meanwhile began to reform the banking sector, which interrupted the banking monopoly and led in competition system into banking sector. During the Asian financial crisis in 1997, China’s banking sector experienced liquidity crises due to over competition, leading to the bankruptcy of Hainan Development Bank because of exhausted liquidity. The bankruptcy of Hainan Development Bank resulted in the loss of nearly 4 billion yuan of People’s Bank of China, which had a graveness influence on China’s banking sector. In addition, China’s long-term trade surplus and a large inflow of foreign capital lead to the excess liquidity in the banking sector. In the pressure of such excess liquidity, banks will blindly decrease lending rates to get inter-bank rate lower than bank-deposit rate appearing interest rate inversion phenomenon to decrease bank returns. In the long term, this will probably accelerate the accumulation of non-performing loan of bank. When the economy changes, asset bubbles of bank will quickly be shattered, which will directly result in the systematic financial crisis in the banking sector. Meanwhile, China as a largest trading partner of South Korea has been a key factor on its economy. However, South Korea is lacking of understanding of potential various uncertainties and liquidity risk in China’s Economy, which bases on banking. In this case, South Korea will be significantly influenced due to its highly dependence on China’s Economy if Chinese commercial banks suffer from liquidity risk. Especially, Korean companies already invested in China and global financial companies constantly attempting to expand all over of China should be directly affected.
Therefore, this paper is to analyze the determinants of the bank’s liquidity risk in Chinese commercial banks and what difference between large commercial banks and small-medium commercial banks. The banking data used in this paper were extracted from the database BankScope IBCA-Fitch, the People’s Bank of China and China Statistical Yearbook. We used panel data of 25 commercial banks over the period from 2004 to 2011 to estimate the determinants of liquidity risk by panel OLS, the fixed effects and random effects regression. The results of the empirical analysis are as follows: first, internal factors in banks did not affect the liquidity of the commercial banks in China, but it was affected by macro-economic factors negatively. It implies that the People’s Bank of China will be able to adjust liquidity and manage liquidity risk in commercial banks in China using monetary policy. Second, in terms of asset size of banks, both internal factors in banks and macro-economic factors have influence on the liquidity of large commercial banks in China, however, small-medium commercial banks have only been affected by non-performance loans ratio and macro-economic factors.