Essays on the analysis of performance and competitive condition in the Chinese banking industry

  • Yong Tan

    Student thesis: Doctoral Thesis


    The banking sector is an important component of the financial system in China; its effective functioning plays a vital role in the country's economic growth. Since 1978, the Chinese banking sector has undergone several rounds of reforms, the purpose of which is to improve bank performance, increase competition and create a more stable environment in the Chinese banking industry. Empirical literature has investigated Chinese bank performance from different perspectives, such as bank profitability or efficiency; few studies also focus on the examination of the competitive conditions of the Chinese banking sector. The main contribution of this thesis is to provide a comprehensive analysis of the issues in the Chinese banking sector which covers the topics of bank profitability, bank technical efficiency, bank productivity, risk and competition. In particular, the thesis emphasises the linkages between them. The data period covers the period from 2003-2009. This period is characterized by significant banking reforms initiated by the Chinese government, especially the establishment of the China Banking Regulatory Commission (CBRC) in 2003 which has had a profound impact on bank performance, competitive conditions and risk management of Chinese banks. The types of banks considered in the current study include all the state-owned banks, the joint-stock commercial banks and 84 city commercial banks, which are the three largest banking groups in terms of total assets over the period examined.

    As its title indicates, the main focus of this thesis lies in the analysis of performance and competitive conditions in the Chinese banking industry. The main objectives of the thesis can be summarised as follows:

    The study investigates the determinants of bank profitability; in particular, the study emphasises the effects of inflation, GDP growth rate and stock market volatility on bank profitability. Following the estimation of bank profitability, the study estimates the competitive conditions of the Chinese banking sector. Finally, technical efficiency and productivity growth, which are regarded as two other important performance indicators, are examined for Chinese banks over the period 2003-2009.

    Due to the issue of large volumes of non-performing loans in the Chinese banking industry, together with the financial crisis which happened in Asia in 2007, the Chinese government and the banking regulatory authority attach importance to the risk-taking behaviour of Chinese banks. Therefore, the study aims to investigate the risk condition of Chinese banks. In particular, the inter-relationships between risk and bank competition, and risk and bank performance are examined. To be more specific, the study 1) examines the effect of competition on banks' risk taking behaviour; 2) assesses the inter-relationships between bank risk, competition and profitability; 3) investigates the inter-relationships between bank risk and technical efficiency; and 4) evaluates the relationships between risk, capitalization and efficiency. Since the last round of banking reform after China joined the WTO encouraged Chinese banks to be listed on the stock exchange, the share performance is paid great attention by bank managers; thus, this thesis tests the impacts of share return and risk on efficiency and productivity. The inter- relationships between bank competition and bank performance are also investigated. In particular, this study 1) evaluates the impacts of efficiency and concentration on bank competition; 2) investigates the impacts of competition and profitability on technical efficiency; 3) test the impacts of competition and efficiency on bank profitability; 4) assesses the impacts of technical efficiency and risk on bank competition.

    The empirical findings suggest that inflation has a significant and positive impact on Chinese bank profitability in terms of Return on Assets (ROA) and Net Interest Margin (NIM). Furthermore, Chinese banks have lower profitability in relation to ROA and NIM during periods of economic boom (higher GDP growth). In addition, the results suggest that higher levels of stock market volatility can translate into higher profitability of Chinese banks in terms of Return on Equity (ROE) and Excess Return on Equity (EROE). Finally, we report that Chinese bank profitability (ROA and NIM) is significantly and positively affected by overhead cost, banking sector development, stock market development, while it is negatively affected by taxation. We find that Chinese banks with higher labour productivity have lower profitability in terms of Economic Value Added (EVA).

    Our results suggest that, over the examined period 2003 2009, the Chinese banking sector is in a state of monopolistic competition as examined by Panzar-Rosse's H statistic. When using the Lerner index as the competition indicator, the findings suggest that joint-stock commercial banks have the highest level of competition over the period examined. With regards to the efficiency of Chinese banks, the findings suggest that state-owned commercial banks have the highest technical efficiency, followed by joint-stock commercial banks with the city commercial banks being the least technically efficient. The results indicate further that scale efficiency contributes more than pure technical efficiency to the overall efficiency of Chinese banks and that Chinese banks are faced with a misallocation of inputs and outputs in banking operations. The productivity of three types of Chinese commercial banks (state-owned, joint-stock and city commercial banks) is quite stable over the period examined; these three types of banks show productivity growth in 2005 and 2009. The empirical results show that, in a more highly concentrated market competition (measured by the Panzar-Rosse H statistic) is lower. We further find that in a more highly competitive environment (measured by the Lerner index), bank profitability is still lower. We do not find any robust relationships between risk and profitability, or risk and competition.

    Although we do not find any significant impacts of competition and efficiency on bank profitability, our results suggest that Chinese banks with lower levels of liquidity and more diversified activities have higher technical efficiency. Furthermore, it is found that in a more developed but less competitive banking sector, Chinese banks are more technically efficient. Chinese banks with higher share returns have more stable efficiency, while the stability of efficiency and productivity in the Chinese banking sector is affected significantly by bank size, capitalization, banking sector development, inflation and GDP growth rate. In terms of the relationships between risk, capital and efficiency, the results suggest that the levels of capitalization are significantly and positively related to technical and pure technical efficiencies of Chinese banks, while Chinese banks with higher technical and pure technical efficiencies have higher levels of capitalization. We do not find any robust relationships between risk and technical efficiency in the Chinese banking sector; in addition, there is no clear evidence for the impacts of competition and technical efficiency on bank profitability in China. Finally, we report that there is a negative impact of technical efficiency on bank competition. In other words, Chinese banks with higher technical efficiency have greater market power.

    In conclusion, this study provides a comprehensive analysis of several empirical issues in the Chinese banking sector including bank profitability, technical efficiency, bank productivity, competitive and risk conditions and potential linkages among them over the period 2003-2009. The results provide important policy implications for the Chinese government: 1) Chinese banks should increase further the capital levels in order to improve technical efficiency; 2) Chinese bank managers should allocate the inputs and outputs in banking operations more appropriately, thereby contributing to technical efficiency improvement; 3) Chinese banks should provide more training and professional opportunities for staff, especially in the areas of non-traditional activities; this leads to the improvement of technical efficiency; 4) with a more improved risk management system, Chinese banks should be encouraged to engage in more loan business, which precedes an increase in bank efficiency.
    Date of AwardDec 2013
    Original languageEnglish
    Awarding Institution
    • University of Portsmouth
    SupervisorChristos Floros (Supervisor) & Judith Rich (Supervisor)

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