Bank Ownership and Efficiency in China: What Will Happen in the World's Largest Nation?

Abstract

China's economy has been growing rapidly based on globalization of trade, but the country is only beginning to globalize its banking sector. China's current banking reform includes partially privatizing three of its dominant Big Four state-owned banks and taking on minority foreign ownership of these institutions. Other state-owned banks are also engaging in this practice. Predicting the efficiency effects of these and other reforms is difficult because of little relevant background research evidence. This paper helps to fill some of the gaps in the literature, analyzing the profit and cost efficiency of banks representing 95% of commercial banking assets in China over 1994-2003 with different majority and minority ownership structures. The key findings are that the Big Four state-owned banks are by far the least efficient, and that minority foreign ownership of other banks is associated with significantly improved efficiency. These and other findings suggest that minority foreign ownership of the Big Four and other reforms that allow foreign banks to play larger roles will likely improve the performance of the Chinese banking sector, with positive effects on economic growth.

Keywords: China, Banks, Efficiency, Foreign ownership

JEL Classification: G21, G28, G34, F23