| This paper examines the relationship between market structure and performance in China's commercial banking system over the period of 2001 to 2008. The models are based on the study of Berger (1995) and Chortareas et al. (2009), using panel data estimation techniques to test the market power (structure-conduct-performance and relative-market-power) and the efficient structure (X-and scale efficiency) hypotheses. I also use data envelopment analysis (DEA) technique to obtain reliable efficiency measures. In addition, firm specific characteristics (capitalization, liquidity risk and bank size) were introduced and'quite life'hypothesis was considered.The average X-efficiency in China is quite low with a notable fluctuation during these years. The empirical results found no evidence that supports any of the four hypotheses. The relationship between concentration (in terms of Herfindahl-Hirschman-Index, HHI) and profitability (in terms of ROA) was significantly negative, indicating that a less concentrated banking system may increase bank profitability. The findings from test on'quiet life'hypothesis provide an explanation for the low X-efficiency level in China's banking sector. Finally, the suggestion is to improve competitive structure in banking sector.The advantage of this paper is that it uses an empirical estimation to verify the applicability of market power hypothesis and efficient structure hypothesis in China's banking system, and tests structure-performance relationship and efficiency in the same model, which is different from the traditional literatures that test banking structure or efficiency alone. The drawback of this paper is that the numbers of samples are inadequate, and relative-analysis method made inaccurate results at the beginning of the period. Moreover, it is not conducive to analyze the specific reasons for the performance of data fluctuations, because 2003 was an important turning point in China's commercial banking reform, which led to a greater fluctuate result. |
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