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Production efficiency of Chinese banks: a revisit

Xiaotian Tina Zhang (Finance Department, School of Economics and Business Administration, Saint Mary's College of California, Moraga, California, USA)
Yong Wang (Accounting and Finance Department, College of Business, Western New England University, Springfield, Massachusetts, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 7 October 2014

893

Abstract

Purpose

The last decade witnessed the reform of China's financial sector, during which Chinese commercial banks’ ownership and operation had been significantly changed in order to improve efficiency. The purpose of this paper is to investigates whether these banks have improved their productivity efficiency during their rapid expansion and growth in the post reform era from 2004 to 2011.

Design/methodology/approach

Data envelopment analysis is used to investigate the production efficiency of Chinese commercial banks during 2004-2011. First, the technical efficiency (TE) score is constructed to evaluate bank productivity. The TE score is disintegrated into pure technical efficiency (PTE) and scale efficiency (SE) to examine the effects of technical factors and scale economies. Second, the Malmquist index is constructed to explore the year-by-year productivity. Lastly, regression analysis examines how bank characteristics and ownership structure affect productivity efficiency.

Findings

The Big Four banks are less efficient than other commercial banks, and public banks are less efficient than private banks. The low efficiency is primarily due to scale inefficiency, rather than PTE. In addition, ownership structure impacts production efficiency. Specifically, foreign ownership is related to high efficiency while state ownership is associated with lower productivity.

Research limitations/implications

There were small observations of public banks in China. Thus, a more comprehensive test is impractical to explore whether or not annual changes in ownership structure improve their production efficiency. With more date, such a test will reveal further information about the relationship between ownership and productivity.

Originality/value

The authors are the first to assess the production efficiency of Chinese commercial banks after the recent financial reform during which Chinese commercial banks had undergone significant structural changes. The lower overall productivity of Big Four and public banks is a result of scale inefficiency, although these banks are better than their peers with respect to input-output transformation.

Keywords

Acknowledgements

JEL Classifications — G21, G28, G32, C52, F23

Citation

Tina Zhang, X. and Wang, Y. (2014), "Production efficiency of Chinese banks: a revisit", Managerial Finance, Vol. 40 No. 10, pp. 969-986. https://doi.org/10.1108/MF-05-2013-0115

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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