Measuring Bank Competition in China: A Comparison of New Versus Conventional Approaches Applied to Loan Markets

68 Pages Posted: 27 Feb 2014

See all articles by Bing Xu

Bing Xu

Universidad Carlos III de Madrid

Adrian Rixtel

Bank for International Settlements (BIS)

Michiel van Leuvensteijn

Corporate Strategy & Policy, APG

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar-Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these firstly are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed.

Keywords: Competition, banking industry, China, lending markets, marginal costs, regulation, deregulation

JEL Classification: D4, G21, L1

Suggested Citation

Xu, Bing and Rixtel, Adrian and van Leuvensteijn, Michiel, Measuring Bank Competition in China: A Comparison of New Versus Conventional Approaches Applied to Loan Markets (August 2013). BIS Working Paper No. 422, Available at SSRN: https://ssrn.com/abstract=2390165

Bing Xu (Contact Author)

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Adrian Rixtel

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Michiel Van Leuvensteijn

Corporate Strategy & Policy, APG ( email )

Gustav Mahlerplein 3, 1082 MS
Amsterdam
Netherlands
+31206049173 (Phone)

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