Chinese Commercial Banks X-efficiency Studies

Since the year 2003, Chinese state-owned commercial banks have started to move towards shareholding system reform and shift to market-oriented operations. Also, foreign commercial banks are developing quickly at the same time, which pushes Chinese joint-stock banks to improve themselves and enhance the management capacity. During this process, how the Chinese commercial banks' efficiency changed is an issue worth studying.Therefore, on the basis of X-Efficiency Theory, this paper makes an empirical study on the Chinese commercial banks X-Efficiency, using the cost function forms of stochastic frontier approach. During the empirical study, some control variables which reflect the banks'individual characteristics are selected so that the assumption of the same production technology is relaxed, which makes the estimation results can reflect different production techniques. According to empirical results, further comparative analysis of the differences between the five large commercial banks and other joint-stock commercial banks is made.Based on the measure of X-Efficiency, this paper further studies the implication to Chinese commercial banks management. After studying the relationship between traditional financial performance indicators and X-Efficiency, this paper concludes that the Chinese banks should make more focus on cost management and improve their risk management capabilities rather than expand their business and market shares without the consideration of risk, in order to improve their profitability. Then this paper makes a preliminary study on the use of X-Efficiency in performance evaluation. Including some non-financial indicators in the performance evaluation indicators and redesigning the employee incentive mechanism will enhance the growth potential. Since most Chinese banks have many branches, adding X-Efficiency into the performance evaluation indicators can help to analyze the operating status of branches and make appropriate development strategy.