The Effects of Governance Changes on Bank Efficiency in China: A Stochastic Distance Function Approach

Abstract

China has accelerated and deepened bank reform since it joined the WTO in 2001. Employing a stochastic distance function, this paper investigates the technical efficiency of banks and examines the static, selection and dynamic effects of governance changes on bank efficiency in China for the period 1995-2005. Our results show that bank efficiency has been improved and state-owned banks still perform poorly except for a noticeable improvement from 2003. Strong selection effects are found from both the foreign acquisition and going-public reform strategies. Foreign acquisition may benefit bank efficiency in the long run, but going-public appears to have just some short run effects. One obvious policy implication is that foreign competition is beneficial to China's on-going bank reform, and going-public is just a means to allow effective foreign competition.

Keywords: Distance function, Efficiency, Banking, China

JEL Classification: D21, L32, P31