Evaluating the Effectiveness of China's Financial Reform The Efficiency of China's Domestic Banks

This paper estimates the cost and pro t e¢ ciency of Chinese domestic banking sector to evaluate the e¤ectiveness of Chinas nancial reforms since 1978. We use the performance of foreign banks as the benchmark because for- eign banks, subject to intensive worldwide competition, are perceived as pos- sessing superior governing structure and organization, more advanced technolo- gies and better trained labor force. On the other hand, competition in Chinas banking sector is mainly in the form of nonprice measures, thus putting foreign banks at a disadvantage. We nd domestic banks have gradually caught up the cost advantage of foreign banks in a manner consistent with the increased com- petitive pressure. On the other hand, the pro t advantage of domestic banks over foreign banks is widening because of institutional arrangements, cultural and social networks as well as the pro t scope and revenue scale economy.