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
Date Written: July 2005
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
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