China’s Banks Ownership and Performance

This paper constructs a model of Chinese banking operating within China. In the last decade the Chinese government owned banks have undergone a privatization program resulting in considerable changes in ownership of Chinese banks. These changes invite important questions to be answered. In particular how have banks changed in terms of performance indicators with changes in ownership structure? This paper attempts to answer these questions by employing an econometric model that utilizes the performance effects of various types of bank ownership and applies this unique data set on Chinese banks at the firm specific data level. By using the panel data of China's banks during the period from 2003–2010, we carry out a series of regressions to analyze the performance effects of various forms of bank ownership including state-owned banks, city commercial banks, rural commercial banks, other commercial banks, foreign banks in China and overseas subsidiaries. Our results indicate that the Big Four state owned commercial banks are less profitable than the other forms of ownership considered. In terms of overall performance our results indicate that both overseas subsidiaries of Chinese's banks and foreign banks operating within China are highly profitable earning significant returns on assets and in the case of so called City banks the results report a high and positive return on equity. Interestingly the major four state owned banks indicate the lowest performance across the various ownership structures examined in terms of returns on assets, percentage of non-performing loans and non interest expenses. The underperformance of the big state owned banks is consistent with the agency view the social view and the political view of state ownership. Most existing empirical arguments support these arguments. The results also suggest that banks involved in foreign acquisitions outperformed banks not involved in foreign acquisitions. The return on assets (ROA), return on equity (ROE), non-interest expense/average Assets (NIE) and impaired loans/gross loans (NPL) are all statistically significantly better for banks selected for foreign acquisition than those that are not