China: The Effects of Bank Reform on Structure and Performance

Cass Business School Faculty of Finance Working Paper No. WP-FF-19-2005

23 Pages Posted: 19 May 2006

See all articles by Shelagh Heffernan

Shelagh Heffernan

City University London - Sir John Cass Business School

Maggie Fu

University of Macau - Faculty of Business Administration

Date Written: July 2005

Abstract

This paper investigates the relationship between market structure and performance in China's banking system over the period 1985-2002. Using panel data and employing a random effects estimating procedure, 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 effect and whether the big four banks enjoy a "quiet life". The results suggest the strategy of gradual reform affected the structure of China's banking market, but new policies should be directed at increasing the market share of the most efficient banks. No evidence was found to support the quiet life hypothesis, probably because strict interest rate controls prevented the state banks from earning monopoly profits. Thus the ongoing liberalization of interest rates should be accompanied by policies to reduce concentration.

Keywords: Market structure, Industry performance, China's banking sector

Suggested Citation

Heffernan, Shelagh A. and Fu, Xiaoqing, China: The Effects of Bank Reform on Structure and Performance (July 2005). Cass Business School Faculty of Finance Working Paper No. WP-FF-19-2005, Available at SSRN: https://ssrn.com/abstract=903347 or http://dx.doi.org/10.2139/ssrn.903347

Shelagh A. Heffernan (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Xiaoqing Fu

University of Macau - Faculty of Business Administration ( email )

Macau
(853) 397-4747 (Phone)
(853) 838320 (Fax)

HOME PAGE: http://www.umac.mo/fba/staff/maggiefu.html

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