China’s Banking Reform On The Impact Of Bank Efficiency

Commercial Banking industry is one of the most important financial institutions in our economy. In order to improve risk control ability, increase their core competitiveness, reduce costs, improve efficiency, strengthen the financial base and improve the efficiency of the allocation of the assets., China’s banking industry has carried out a series of effective reform in the past20years.The two main measures of the reform of China’s banking industry are the strategic attraction of capital and the IPO. After this series of reform, China’s commercial banks are from the credit issuing task "fiscal cashier" gradually into modern enterprise in accordance with the rules of the market. China’s banking industry has grown to be a real market player in the pursuit of profit and efficiency.The project of the commercial banks efficiency is theoretical and practical significance with cross-cutting, comprehensive and practical features. In this paper, we study the efficiency of commercial banks with the use of accounting, finance and economics expertise combining normative and Empirical Analysis, qualitative analysis and quantitative description.The paper firstly reviews the research status of cost efficiency and profit efficiency, and then put forward hypotheses of this article based on bank efficiency theory, and builds a theoretical model of this paper based on Battese and Coelli (1995) model and previous research. Thirdly, we choose China’s four major state-owned commercial banks,13national joint-stock commercial banks as well as62city commercial banks as a research object. The sample includes79banks from1999to2010, taking into account the563observations. We estimate the cost efficiency and profit efficiency of commercial banks, evaluate the efficiency of the overall trend of the banking from1999to2010and the impact of strategic investors and IPO on banks efficiency. Finally, we propose methods and recommendations to improve the banks’cost efficiency and profit efficiency based on the above analysis and the actual situation of China’s banking industry, and point out the defects in this study and look to the future study of bank efficiency.The research of this paper includes the following aspects:Firstly, cost efficiency and profit efficiency of commercial banks in China are rising in the sample period. This shows that China’s banking industry efficiency has been improved after decades of reform,.Secondly, the cost efficiency of the state-owned commercial banks is significantly higher than the city commercial banks. This is because that the state-owned banks are the ultimate holding by the state bearing a large number of policy-related businesses due to historical reasons. China’s banking industry has undergone enormous changes under decades of financial reform; however, the four state-owned banks still bear the policy business in the development of the national economy and national industrial policy, which leads to large amounts of non-performing loans. The presence of these non-performing loans not only can not be profitable for the bank, but also diluted the banks’ cost, which eventually improves the cost-efficiency of the state-owned banks.Thirdly, in our country, strategic attraction of capital and the IPO have obvious selection effects. Foreign investors tend to choose and the excellent performance banks to invest. If one bank want to have an IPO, it requires to achieve the standards prescribed by the SFC, which prompts those who wish to list to improve their own information disclosure system, asset quality, and the profitability of the banks. So the IPO banks have a higher level of efficiency reflecting the effect of the choice of IPO.Fourthly, strategic attraction of capital reduces the efficiency of the foreign capital banks. On the one hand, strategic attraction of capital prompts banks to increase technology capital and initial investment, and conduct more robust operating activities on the expense of the bank’s short-term profits. On the other hand, strategic investors make the behavior of short-term interests due to the limitations of our strategic investors’stake. These lead to a decrease of the bank’s efficiency after introduction of foreign strategic investors.Lastly, IPO improves bank efficiency in the short term, but detract bank efficiency in the long term. Those banks that wish to have an IPO may whitewash financial statements, conduct earnings management and financial restructuring to achieve the listing conditions stipulated by the SFC. These measures may improve the bank’s financial position and the profit-efficiency in the short term. But these measures do not have the long-term sustainability, and therefore can not promote the efficiency of the bank in the long term.The main innovation in this article is a large sample. Previous literature mainly focused on China’s four state-owned commercial banks and national joint-stock commercial banks. The sample of this study includes not only China’s four state-owned commercial banks and national joint-stock commercial banks, but also includes62city commercial banks. We finally get563observations.However, due to the limited reserves of knowledge and China’s complex economic and financial environment, the article also has the following disadvantages:Firstly, it is the choice of the output indicators. Because we are unable to obtain the specific values of the non-performing loans, the total loans contain the non-performing loans. It results in larger bias in the estimating of cost efficiency and do not accurately reflect the level of the bank’s cost efficiency.Secondly, the calculation of the average market input prices is not reasonable enough. A bank’s average market input prices is based on similar banks’(In addition to the Bank) average unweighted factor prices. This has led that banks with higher input prices having a value below the average market price, and that banks with lower input prices having a value higher than average market price. This affects the accuracy of the empirical results to some extent.