Banking reforms, performance and risk in China

ABSTRACT

We investigate the impact of the banking reform started from 2005 on ownership structures in China on commercial banks’ profitability, efficiency and risk over the period 2000–2012, providing comprehensive evidence on the impact of banking reform in China. We find that banks on average tend to have higher profitability, lower risk and lower efficiency after the reforms, and the results are robust with our difference-in-difference approach. Our results also show that the Big 5 state-owned banks (SOCB) underperform banks with other types of ownership when risk is measured by non-performing loans (NPLs) over the entire study period but tend to have fewer NPLs than other banks during the post-reform period. Our results provide some supporting evidence on the ongoing banking reforms in China, suggesting that attracting strategic foreign investors and listing SOCBs on stock exchanges appear to be effective ways to help SOCBs deal with the problem of NPLs and manage their risk.

KEYWORDS:

• Bank reforms
• performance
• efficiency
• risk
• ownership structure

JEL CLASSIFICATION:

• G21
• G28
• G32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For more detail on the process of Chinese banking reforms refer to Berger, Hasan and Zhou (2009), Dong et al. (2014), Fu and Heffernan (2009) and Okazaki (2007).

² The Bank of China not only was established as a private bank in 1912, but also had central bank responsibility before 1979. It was separated from the PBOC in 1979. The China Construction Bank was established in 1954 and the Agricultural Bank of China was re-established in 1979. In 1984, the Industrial and Commercial Bank of China was established and the role of the PBOC as the central bank was clearly defined, indicating that the ‘two-tier’ banking system (Fu and Heffernan 2009) was preliminarily created.

³ BOCOM used to be classed as a JSCB but was redefined by the CBRC as a SOCB in 2006, considering that it is much larger than the other JSCBs and its share ownership is spread among different state-owned entities (Dong et al. 2014).

⁴ CCB issued IPOs in Hong Kong in October 2005, BOC issued IPOs in Hong Kong in June 2006 and then listed A-shares on the Shanghai Stock Exchange in July 2006, ICBC issued its IPOs in both Shanghai and Hong Kong in October 2006 and ABC listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange in July 2010.

⁵ Regional city or rural commercial banks are owned by local government, local enterprises and households, offering commercial banking services to city-based or rural small to medium-sized enterprises and residents (Fu and Heffernan 2009). Some were created based on the restructuring and consolidation of urban or rural credit cooperatives (UCCs or RCCs) (Dong et al. 2014).

⁶ There are three main parametric approaches, including the stochastic frontier approach (SFA), the distribution-free approach and the thick frontier approach (TFA), and two commonly used non-parametric approaches: the data envelopment analysis (DEA) and the free disposal hull approach (FDH). For a detailed discussion of methods used to measure bank efficiency, refer to Berger and Humphrey (1997).

⁷ The results for both fixed and random effects are shown in Appendix. The results are consistent with our main results. The main reason we do not use fixed effects model in the first place is that the ownership dummy variables, e.g. Big 5 etc., which are constant at firm level, will be dropped from the fixed effects regressions.