Evaluating the Effectiveness of China's Financial Reform The Efficiency of China's Domestic Banks

Abstract

This paper estimates the cost and pro…t e¢ ciency of Chinese domestic banking sector to evaluate the e¤ectiveness of China's …nancial reforms since 1978. We use the performance of foreign banks as the benchmark because foreign banks, subject to intensive worldwide competition, are perceived as possessing superior governing structure and organization, more advanced technologies and better trained labor force. On the other hand, competition in China's banking sector is mainly in the form of nonprice measures, thus putting foreign banks at a disadvantage. We …nd domestic banks have gradually caught up the cost advantage of foreign banks in a manner consistent with the increased competitive pressure. On the other hand, the pro…t advantage of domestic banks over foreign banks is widening because of institutional arrangements, cultural and social networks as well as the pro…t scope and revenue scale economy.We would like to thank a referee and a co-editor, G.

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