World Financial Crisis and Efficiency of Chinese C

WorldFinancialCrisisandEfficiencyofChineseCommercialBanksDanLuo1,ShujieYao1,2,JianChen1andJianlingWang21UniversityofNottinghamand2Xi’anJiaotongUniversity1.INTRODUCTIONTHEglobalcreditcrunchsincethesecondhalfof2007disruptedthestabil-ityoftheworldfinancialmarket.Sharepricesofsomeoftheworld’sbankinggiants,suchasCitigroupandtheRoyalBankofScotland(RBS),tum-bledbymorethan95percentfrom2007toJanuary2009.However,itsinflu-encetotheChinesebankingsectorwasquitelimitedasChinesebanksaremuchmoreconservativethanforeigncounterpartsinderivativesinvestment.Facinganextremelyvolatilefinancialenvironmentin2008,theperformanceofChinesecommercialbanksoutshinedtherestoftheworld.Thethreebiggeststate-ownedbanks(SOBs)hadreplacedAmericanandEuropeangiantstobecometheworld’slargestbanksinmarketcapitalisationbyearly2009.ThisdramaticdevelopmenttriggeredourresearchquestionastohowChi-nesecommercialbanksmanagedtobecomethebiggestwinnersintheworldbankingsystemasaresultofthecrisis.TheanswertothiscomesfromChina’slatestbankingreformfocusingonownershiptransformationviaforeignpartici-pationandstocklisting.TocomparebankefficiencybeforeandaftertheirIPOs,wewillemploybothnon-parametricapproach,dataenvelopmentanalysis(DEA),andtheparametricapproach,SFA,toexaminetheefficiencylevelsof14listedChinesecommercialbanksovertheperiod1999–2008.Inaddition,afewotherquestionswillalsobeaddressed.Forexample,howefficientareChi-neselistedbankscurrently?HavetheSOBsbecomemoreefficientafteraseriesofstatesupports?HowisthescaleefficiencyofChineseSOBs?WhatarethekeydeterminantsofbankefficiencyinChina?Whataretheimplica-tionsofthecurrentworldfinancialcrisisontheChineseSOBs?Therestofthepaperisorganisedasfollows.Section2discussesthepro-cessofbankreformandevaluatescurrentperformanceoftheChinesebankingTheWorldEconomy(2011)doi:10.1111/j.1467-9701.2011.01354.x2011BlackwellPublishingLtd.,9600GarsingtonRoad,Oxford,OX42DQ,UKand350MainStreet,Malden,MA02148,USA.805TheWorldEconomysector.Section3reviewstheliteratureonbankefficiencystudies.Section4discussesresearchmethodologies.Section5describesthedataandpresentsmodellingresults.Section6discussespolicyimplicationsforthefurtherdevelopmentofChinesecommercialbanksandconcludesthewholepaper.2.CHINESECOMMERCIALBANKSa.FourStagesofChineseBankingSystemReformInaccordancewithChineseeconomicreform,itsbankingsectorhadalsoexperiencedsignificantchangessince1978.Initialreformprocessesmainlyincludedtheestablishmentofatwo-tierbankingsystem,reorganisationofthePeople’sBankofChina(PBOC),thepromulgationoftheCentralBankLawandCommercialBankLaw,restructuringofurbancooperativesintocitycom-mercialbanks(CCBs)andestablishmentoffourAssetManagementCompanies(AMCs)in1999andtheChineseBankingRegulatoryCommission(CBRC)in2003.Inresponsetoincreasedcompetitionafterforeignentry,Chinesebankingreformhadacceleratedanddeepenedinthe2000s.ThecentralgovernmentunloadedaboutRMB2.6trillionnon-performingloans(NPLs)fromthethreebiggestSOBsover1999to2005torestoretheirfinancialhealthandthenpushedthebankingreformtothefinalstage,ownershiprestructuringviaforeignacqui-sitionandstocklisting.In2003,theCBRCupdateditsguidelinestoencourageforeigninvestment,andthisencouragedforeigninvestment.AllthethreebiggestSOBsattractedsubstantialforeigninvestmentfromworld-renownedfinancialinstitutions,suchastheRBS,MerrillLynchandBankofAmerica(BOA).InOctober2005,ChinaConstructionBank(CCB)becamethefirstlistedSOB,andthiswasfollowedbytheBOCandtheICBCin2006.Thisperiodalsosawthelistingofseveraljoint-equitybanks(JECBs),andtheyjointlyexertedstrongimpactoverthefinancialmarkets(Yaoetal.,2008).b.CurrentPerformanceofChineseCommercialBanksAfteraseriesofstatesupports,theamountofNPLsoftheSOBsdecreasedsignificantlyinrecentyears.FollowingotherSOBs,theStateCouncilinjectedRMB130billiontotheAgriculturalBankofChina(ABC)inOctober2008toreduceitsNPLratiosharplyto4.32percentandfinalisedtheshareholdingreformplanforthebank(Areddy,2008).Bytheendof2009,theNPLs=totalloansratiooftheSOBswasreducedto1.8percent(Table1).ThesameratioofJECBsandCCBsalsodecreasedsharplyto0.95and1.3percent,respectively,2011BlackwellPublishingLtd.806D.LUOETAL.indicatingthatallChinesecommercialbankshadimprovedtheirriskmanage-mentandcreditcontrolabilities.Meanwhile,theprofitabilityofthemajorChinesecommercialbankshadalsobeenenhanced.In2008,China’sbankingindustryreportedRMB583.4billion($85.79billion)inafter-taxprofit,upby30.6percentyear-on-year(XinhuaNet,2009).ThreeofChina’sbiggestSOBswereamongtheworld’sfivemostprofitablebanksin2008.ICBCwithtotalprofitofRMB111.2billiontookfirstplace(Hawser,2009).ThiswasfollowedbyCCBandBOC,whichtooksecondandfourthplaces,respectively.Influencedbytheworldfinancialcrisis,sharepricesofChinesecommercialbanksplummetedin2008.However,astheeconomyimproved,Chinesebank-ingstocksreboundedrapidly(Figure1).Inearly2009,China’sthreelargestSOBshadreplacedtheAmericanandEuropeangiantstobecomethethreelargestcommercialbanksintheworldmeasuredbymarketcapitalisationaftertheywerelistedontheHKSEandSSEonlytwoyearsearlier.Thankstotheirrisk-aversenature,Chinese-listedSOBsturnedouttobetheleastaffectedbythec