Banking Sector Reforms and Commercial Bank Performance in China

The Chinese banking sector has gone through a consistent process of the reform which includes liberalization of the business to foreign banks, privatization and listing bank shares, allowing diversifications into intermediary business beyond the traditional deposit and loan activities. In the mean time, the changing structures of the banking sector and the favourable economic condition in the recent decade have promoted the development of the commercial banks. We collect a sample of 80 Chinese commercial banks for the period from 2000 to 2008, and investigate the determinants of bank performance. Aggregate index measures of performance are constructed based on proxy variables that assess the quality of assets, capital adequacy, profitability, and liquidity. Potential determinants at bank level, industry level, and macroeconomic level are examined in the panel data models. We find that city commercial banks out-perform the national banks which include state owned big four banks and joint-stock banks. Our evidence also suggests lower financial leverage, higher off-balance sheet activities, and larger size of the bank are associated with better performance. At industry level, concentration of the banking sector has allowed better performance due to less competitive environment. The liberalization of the banking business to foreign banks in 2003 has an encouraging effect on the banking sector, although the evidence is not statistically significant. At macroeconomic level, higher per capita GDP and lower unemployment has been significantly related to better bank performance. JEL classification: G21