Does Property Rights Reform Improve the Efficiency of China's State‐owned Banks?

• Published date: 01 July 2014
• Author: Qian Wang,Xiaochu Feng
• DOI: http://doi.org/10.1111/j.1749-124X.2014.12072.x
• Date: 01 July 2014

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China & World Economy / 1–20, Vol. 22, No. 4, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Does Property Rights Reform Improve the Efficiency

of China’s State-owned Banks?

Qian Wang, Xiaochu Feng*

Abstract

China’s state-owned banks have undergone radical changes over the past two decades,

including partial privatization and listing in both the Hong Kong Stock Exchange and the

Shanghai Stock Exchange. This paper evaluates the effects of these changes by analyzing the

efficiency of Chinese banks over the period 1998–2012 using two frontier techniques and

comparative analysis. The findings suggest that the performance and technical efficiency of

the Big Four banks improved considerably after property rights reform, but this improvement

is not sufficient to keep the banks at the production frontier. Tobit regressions confirm that

static ownership effects are negative but that the property rights reform has had significant

and positive effects on the technical efficiency of state-owned commercial banks. GDP

growth and the financial crisis have had positive effects on the efficiency of Chinese banks,

which is more significant for joint stock commercial banks than state-owned commercial

banks. The results indicate the value of ownership reforms of state-owned asset management

companies and insurance companies and the establishment of a countercyclical capital

buffer.

Key words: banking efficiency, China, property rights reform, state-owned bank

JEL codes: G21, G32, G38, N15

I. Introduction

In this paper, we investigate the characteristics and the effects of property rights reform in

China’s state-owned commercial banks (SOCB) by analyzing the efficiency of Chinese

*Qian Wang, Professor, China’s Public Sector Economy Research Center and School of Economics, Jilin

University, Jilin, China. Email: wangqian@jlu.edu.cn; Xiaochu Feng, Department of Finance, Jilin

University, Jilin, China. Part of this research was completed while Qian Wang was visiting Department

of Economics, Harvard University. She thanks the institution for its hospitality and support. The

authors are grateful to Richard Cooper, Bin He and the anonymous reviewers for offering very constructive

suggestions that improved the paper. Qian Wang acknowledges the Fulbright program and “985” project

for financial support.

2Qian Wang, Xiaochu Feng / 1–20, Vol. 22, No. 4, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

banks over the period 1998–2012. The present paper use two frontier techniques and

comparative analysis to study the technical efficiency of Chinese banks following property

rights reform. This investigation is important for several reasons. First, over the past two

decades, China’s SOCB have experienced a series of state-led institutional reforms of

property rights, which makes them a suitable example for examining the effects of ownership

reform on bank efficiency. Knowledge of the effects of prior reforms in China may provide

insight into the likely effects of future reforms. In addition, after the financial crisis, the

international ranking of China’s SOCB rose rapidly. In 2009, the Industrial and Commercial

Bank of China (ICBC) ranked No. 1 in the Banker’s Top 1000 World Banks ranking by

profits, followed by the China Construction Bank (CCB) and the Bank of China (BOC),

ranking second and seventh, respectively. Almost 15 years ago, China’s SOCB were

described as “technically bankrupt” by scholars because of their bad loans (Berger et al.,

2002).1 It would be meaningful to explain the dramatic transformation of China’s SOCB from

“technically bankrupt” to the largest banks in the world.

Whether state ownership of banks induces low levels of efficiency has been debated

in the published literature. Most previous studies on Chinese bank efficiency use data from

before 2005 and focus on the necessity of property rights reforms (Shih et al., 2007; Berger

et al., 2009; Jiang et al., 2009). Some studies use financial ratios or stochastic frontier

analysis (SFA) to measure the performance of China’s SOCB after their listing (McGuinness

and Keasey 2010; Jiang et al., 2013), but none of these investigations have analyzed the

process of property rights reform in China’s SCOB and evaluated the technical efficiency

effects of these changes. To our knowledge, the present paper is the first to utilize a non-

parametric technique and comparative analysis to study the technical efficiency of Chinese

banks after the property rights reforms of SOCB. The present paper is an extension of Ariff

and Can (2008), which addresses key issues of China’s banking reforms using a data

envelopment analysis (DEA)-based technique for data from 1995–2004. However, the

present study differs in a number of ways. First, it investigates the effects of property

rights reforms on bank efficiency. In particular, it focuses on the efficiency changes of

SOCB and extends beyond the findings and explanations of the existing published literature.

In our paper, robustness is achieved by estimating the technical efficiency using two

frontier estimation techniques (DEA and SFA) and comparing the efficiencies of China’s

SOCB before and following ownership reform. In addition, the present paper examines the

impacts of the property rights reform and static ownership on bank efficiency using Tobit

regressions in the second stage. Finally, we provide comprehensive background information

1In 1998 the official non-performing loan ratio of China’s banks was approximately 20 percent, but

economists in the USA estimated the ratio as more like 40–50 percent.