Persistent and Transient Inefficiency: Explaining the Low Efficiency of Chinese Big Banks

Zuzana Fungáčová, Paul-Olivier Klein, Laurent Weill* (Corresponding Author)

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

17 Citations (Scopus)
14 Downloads (Pure)

Abstract

A vast literature shows that China's five largest state-owned banks (the Big Five) suffer from low cost efficiency. We offer a new explanation of this situation, by decomposing overall efficiency of Chinese banks into two parts: persistent and transient efficiency. Using the model of Kumbhakar, Lien, and Hardaker (2014) based on the stochastic frontier approach, we measure persistent and transient efficiency for a large sample of 166 Chinese banks over the period 2008–2015. We show that the lower efficiency of China's Big Five banks is almost entirely due to low persistent cost efficiency, indicating structural problems. On the contrary, the Big Five banks transient efficiency is similar to other Chinese banks, reflecting a good aptitude to minimize their costs in the short-term. Our findings support the view that major structural reforms are needed to enhance the efficiency of China's Big Five banks.
Original languageEnglish
Article number101368
Number of pages16
JournalChina Economic Review
Volume59
Early online date24 Oct 2019
DOIs
Publication statusPublished - Feb 2020

Bibliographical note

We thank Ifthekar Hasan, Chun-Yu Ho, Iikka Korhonen, Jun Wu, Yanrui Wu, the participants of the Conference on China’s Financial Markets and Growth Rebalancing in New York (October 2017), AEA/ASSA meeting in Philadelphia (January 2018), Finnish Economic Association XL Annual Meeting in Turku (February 2018), ESCB China Expert Network workshop in Helsinki (March 2018), XIX April International Academic Conference in Moscow (April 2018), China Financial and Banking System Workshop in Aberdeen (June 2018), CEA Annual Meeting in Edinburgh (June 2018) and the research seminars at the Bank of Finland Institute for Economies in Transition (October 2017), Aix-Marseille School of Economics (January 2018), Leibniz‐Institut für Ost‐ und Südosteuropaforschung in Regensburg (June 2018) for their valuable comments and suggestions.

Keywords

  • banks
  • efficiency
  • China
  • Efficiency
  • Banks

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