| Summary: | Using data from China, we show how the profitability of Chinese banks and corporations evolved after the Loan Prime Rate (LPR) reform in August 2019. With lending rates falling after the reform, we derived empirical results that the profitability of Chinese banks, measured by its return on assets (ROA), increased by 12.7% and the profitability of Chinese corporations, measured by its profit margin, increased by 9.73%. For Chinese corporations, our paper also aims to extend our research to also investigate if the LPR reform had impacted the profit margins of state-owned enterprises (SOEs) and non-SOEs differently. For Chinese Banks, with the reform tightening credit restrictions among banks and also simultaneously decreasing their net interest income, we would like to provide insights as to what is the overall impact on their ROA. Our paper uses the difference-in-difference approach to investigate for the causal relationship between the LPR reform and the profitability of Chinese banks and corporations. Our empirical results show that the LPR reform, that intends to further liberalise interest rates to be more market-oriented, has a significant impact as a determinant of profitability. By controlling for various macroeconomic, firm and bank specific controls, our results are robust and shows that the LPR reform resulted in greater profitability for both the banking and corporate sectors.
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