Operational Performance of Commercial Banks in the Chinese Transitioal Economy
Wu, Hsiu-Ling, Chen, Chien-Hsun, The Journal of Developing Areas
Since the process of economic reform began in China, the Chinese banking system has grown impressively. The aim of this paper is therefore to examine the differences in operational efficiency between China's state-owned commercial banks (SCBs) and shareholding commercial banks using pooled cross-section and time-series data to observe the period between 1996 and 2002. The results showed that, on average, shareholding commercial banks have lower operating costs than the SCBs; that is to say, they display a higher level of "vitality", and greater efficiency. The empirical results also indicated that there has been a significant improvement in the overall operational performance of China's commercial banks in the last few years. By 2002, average operating costs were much lower than during the period 1996-1998. This improvement is clearly related to the growth of the shareholding commercial banks.
JEL Classifications: G21, P34
Keywords: Operational Efficiency, China's Commercial Banks
The most notable issue in transitional economies is banking efficiency. Prior to China's 1979 institutional transformation, Chinese banking system was originally modeled on the mono-banking system of the Soviet Union, with the central planning authorities controlling and regulating all banking activities. Credit cooperatives also served as local agencies of the state banking system, whilst the activities of the People's Bank were restricted to short-term financing. The People's Bank of China (PBC) mixed the roles of Central Bank and commercial banking. Over the past two decades, significant structural changes have been undergone in Chinese banking system. The establishment of stable banking system has attracted significant attention, with the most important reform of Chinese banking system being the transformation of the PBC into a Central Bank in 1984.
Largely as a result of the decentralization of the mono-banking system, and the separation of central and commercial banking functions, Chinese banking system has evolved along similar lines to the financial development of other developing countries. In addition to the PBC taking charge of monetary policy and the supervision of financial institutions, there is a clearly defined structure to China's banking system, which comprises of three policy banks (State Development Bank, Agricultural Development Bank, and Export-Import Bank), four state-owned commercial banks (Bank of China, Industrial & Commercial Bank of China, Agricultural Bank of China, and China Construction Bank), nationwide commercial banks, regional commercial banks, and non-bank financial institutions, for example, trust and investment corporations, finance companies, leasing companies, securities companies, rural credit co-operatives and urban credit co-operatives. Hence, provides an opportunity to examine operating efficiency differences among various forms of banks in China.
Although some progress has been made in reforming Chinese banking system, they are incapable of responding appropriately both to market forces and to the increasing economic importance of the non-state sector.1 The Asian financial crisis of 1997 also taught us an important lesson, mainly; countries had stronger financial institutions and undertook more rapid restructuring of their banking systems were more successful in coping with the financial crisis. Therefore, banking efficiency in itself has become a major concern to China's transitional economy. Indeed, banking reform in China has been an unfinished yet urgent task, tied closely to the reform of state-owned enterprises (SOEs) as well as economic growth. With China now in the World Trade Organization (WTO), reforming the sector seems all the more pressing. In fact, the December 2002 reshuffling of China's top financial regulator, where former chairman of China Securities and Regulatory Commission (CSRC) Zhou Xiaochuan replaced Dai Xianglong as governor of the PBC, reflects this importance. …