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The effects of reform on China's bank structure and performance

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  • Fu, Xiaoqing (Maggie)
  • Heffernan, Shelagh
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    Abstract

    This paper investigates the relationship between market structure and performance in China's banking system from 1985 to 2002, a period when this sector was subject to gradual but notable reform. Using panel data estimation techniques, both the market-power and efficient-structure hypotheses are tested. In addition, the model is extended to consider issues such as the impact of bank size/ownership and whether the big four banks enjoy a "quiet life". On average, X-efficiency declined significantly and most banks were operating below scale efficient levels. Estimation of the structure-performance models lends some support to the relative market-power hypothesis in the early period. The reforms had little impact on the structure of China's banking sector, though the "joint stock" banks became relatively more X-efficient. There was no evidence to support the quiet-life hypothesis, probably because strict interest rate controls prevented the state banks from earning monopoly profits. Thus the ongoing liberalisation of interest rates should be accompanied by reduced concentration. Overall, to improve competitive structure, new policies should be directed at encouraging market entry and increasing the market share of the most efficient banks.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 1 (January)
    Pages: 39-52

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:1:p:39-52

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Market structure and performance Reform of China's banking sector X-efficiency Scale efficiency;

    References

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    Cited by:
    1. Ho, Chun-Yu, 2012. "Market structure, welfare, and banking reform in China," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 291-313.
    2. Chien-Chiang Lee & Meng-Fen Hsieh, 2013. "Beyond Bank Competition and Profitability: Can Moral Hazard Tell Us More?," Journal of Financial Services Research, Springer, vol. 44(1), pages 87-109, August.
    3. Chang, Tzu-Pu & Hu, Jin-Li & Chou, Ray Yeutien & Sun, Lei, 2012. "The sources of bank productivity growth in China during 2002–2009: A disaggregation view," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1997-2006.
    4. Bing Xu & Adrian van Rixtel & Michiel van Leuvensteijn, 2014. "Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets," Banco de Espa�a Working Papers 1404, Banco de Espa�a.
    5. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2013. "Systemically important banks and financial stability: The case of Latin America," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3855-3866.
    6. Qichang Ye & Zongling Xu & Dan Fang, 2012. "Market structure, performance, and efficiency of the Chinese banking sector," Economic Change and Restructuring, Springer, vol. 45(4), pages 337-358, November.
    7. Mei-Ying Huang & Tsu-Tan Fu, 2013. "An examination of the cost efficiency of banks in Taiwan and China using the metafrontier cost function," Journal of Productivity Analysis, Springer, vol. 40(3), pages 387-406, December.
    8. Liang, Qi & Xu, Pisun & Jiraporn, Pornsit, 2013. "Board characteristics and Chinese bank performance," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2953-2968.
    9. Alicia García-Herrero & Sergio Gavilá & Daniel Santabárbara, 2009. "What explains the low profitability of Chinese banks?," Banco de Espa�a Working Papers 0910, Banco de Espa�a.
    10. Wang, Ke & Huang, Wei & Wu, Jie & Liu, Ying-Nan, 2014. "Efficiency measures of the Chinese commercial banking system using an additive two-stage DEA," Omega, Elsevier, vol. 44(C), pages 5-20.
    11. Barros, Carlos P. & Chen, Zhongfei & Liang, Qi Bin & Peypoch, Nicolas, 2011. "Technical efficiency in the Chinese banking sector," Economic Modelling, Elsevier, vol. 28(5), pages 2083-2089, September.
    12. Lee, Chien-Chiang & Hsieh, Meng-Fen, 2014. "Bank reforms, foreign ownership, and financial stability," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 204-224.

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