Deposit or asset? The dominant source of profitability in Chinese commercial banks

This paper examines whether the profitability of Chinese commercial banks depends more on efficiency in raising deposits or on efficiency in allocating loans. Using data for 658 Chinese commercial banks – including state-owned, joint-stock, city, and rural banks – from over 2008 to 2024, we apply the productivity decomposition framework to construct bank-level measures of deposit productivity and asset productivity. We then relate these measures to return on equity (ROE) using panel regressions with year fixed effects. We then relate these measures to return on equity (ROE) in panel regressions with year fixed effects. Profitability is more strongly associated with deposit productivity than with asset productivity. Deposit and asset productivity are negatively related, and the dominance of deposit productivity persists after interest rate liberalization and digitalization. These findings indicate that value creation in China’s banking sector is driven mainly by low-cost deposit funding rather than asset-side efficiency. They also point to a competitive pattern different from that in the United States: banks with higher deposit productivity tend to exhibit weaker asset productivity. The persistent imbalance between funding-side and asset-side efficiency highlights the importance of improving asset allocation efficiency for more balanced and sustainable bank development.