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Does Good Financial Performance Mean Good Financial Intermediation in China?

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  • Tarhan Feyzioglu
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    Abstract

    Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy''s financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/170.

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    Length: 32
    Date of creation: 01 Aug 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/170

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    Related research

    Keywords: Financial intermediation; Bank supervision; Banking; Banking sector; Banks; Depositories; Economic models; Financial management; Performance indicators; Profits; banking system; financial repression; agricultural bank; joint stock; deposit rates; financial institutions; financial sector; financial system; reserve requirement; bank intermediation; interbank market; financial stability; financial capital; financial systems; bank ownership; deposit interest rates; prudential regulation; banking industry; net interest margin; bank market; bank service; deposit interest; foreign exchange; bank value; international standards; interest rate ceilings; reserve requirements; banking activities; bank holding companies; partial derivative; monetary authority; bank loan; capital adequacy; banks ? loans; bank of greece; banking structure; bank lending; excess demand; derivative; financial structure; financial reforms; recapitalization; capital adequacy ratio; return on assets; interest rate controls; bank branches; bank law; financial resources; capital base; banks ? loan; deposit rate; money market; banking system developments; financial markets; nonperforming loan; moral hazard; retained earnings; tier 2 capital; banking institutions; bank holding;

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    Cited by:
    1. Kai Guo & Papa M'B. P. N'Diaye, 2010. "Determinants of China's Private Consumption," IMF Working Papers 10/93, International Monetary Fund.

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