Market Concentration Rate, Competition And The Performance Of Commercial Banks

Chinese commercial banks in modern China were founded in the late of 19th century. They had to compete with foreign banks and traditional financial institutions in the first stage, so that they developed slowly until the break of the First World War. Because the First World War changed the business environment of Chinese commercial banks, however, anti-Japan war interrupted the development process. The People's Republic of China implemented planned economy institution; the banking of china adopted state banking system, People's Bank of China was the unique center of credit, settlement and the issue of money. As the reform of economic system since 1978, the state banking system was broken, meanwhile, four specialized banks were established and these four banks experienced commercialized reform after the middle of 1980s. At the same time, a lot of regional and national joint stock commercial banks were established, Chinese commercial banks had another chance to develop.The purpose of this paper is to analyze the relationship between competition degree and bank performance. First, we estimated the competition degree of modern and present banking of china by structural and non-structural method. The structural method shows that the concentration rate of regional banks in Shanghai and national banks during 1918 to 1936 had a declining trend, and the market structure turned from supreme oligopoly to middle rate of oligopoly. The main character of Present China's banking is that state owned banks have a monopoly advantage. At the same time, the concentration rate declines during the sample period and the market structure turns from oligopoly to monopolistic competition. According to the structural method, the degree of modern and present banking competition should be uprising as the concentration rate declines. We also used non-structural method to measure the degree of modern and present banking competition. Lerner Index method was used to estimate the degree of modern china banking competition and the result shows that the degree of modern national banking and regional banking in Shanghai have the trend of uprising during 1918 to 1936, furthermore, the uprising trend of competition during 1930s is more significant, the average level is more great than 1920s. Panzar-Rosse model was used to estimate the competition degree of modern China and the result shows that the competition degree has an uprising trend, meanwhile, the market structure changed from oligopoly to monopolistic competition.The results of structural and non-structural method show that the competition degree and concentration rate during modern and present China's banking is negatively related, which means that the banking competition degree rises while the concentration rate declines.Second, bank performance comprises micro and macro levels, we use efficiency level to represent micro level bank performance. Data envelope analysis(DEA) method was used to estimate the efficiency of modern Chinese banking and the result shows that the technical efficiency of modern regional banks in Shanghai has a fluctuate declining trend, in contrary, the trend of technical efficiency of modern Chinese national banks is more stead. However, they all show that the efficiency level of 1930s is lower than 1920s. Consequently, stochastic frontier analysis (SFA) method was used to estimate the cost and profit efficiency of present China's banking, the result shows that the efficiency of joint-stock commercial banks is more great than state owned commercial banks, the gap between the cost efficiency of state owned and joint-stock commercial banks decreases, while the gap between the profit efficiency of two kind of commercial banks spreads.In order to analyze the relationship between banking competition and efficiency, we used scattered picture regression line and granger causality test method to analyze the relationship between competition and efficiency of modern and present Chinese banking. The result shows that the relationship between competition and efficiency of modern regional banks in Shanghai and national banks is negatively related, which means as the banking competition increases, the efficiency declines. In contrary, the relationship between banking competition degree and cost efficiency of present China is positively related, furthermore, competition degree of banking is the granger cause of efficiency, which means the increase of banking competition raise the cost efficiency.Third, for analyzing the relationship between competition and macro level performance, we analyzed the influence of banking competition on the finance behavior of manufacturing department, so as to judge the influence on economic development indirectly. The result shows that the increase of competition degree is benefit for the development of greater financial dependent manufacturing industry, because the increase of competition degree promotes banks to improve management and efficiency, so that they can provide more convenient services for manufacturing department, which benefited the development of more financial dependent manufacturing industry since these department can increase investment. These benefits can promote the technological advances and scale expansion. In this way, the banking competition can improve the economic development.In a word, the analysis of management institution and business environment of modern and present Chinese banking supported the idea of Structure-Conduction-Performance (SCP), which means the concentration rate and competition degree is negatively related. Meanwhile, this paper provided the falsification evidence for the idea that competition can improve the efficiency. The increase of the competition degree can improve the efficiency only in the orderly competition environment.Finally, this paper provided theory basis for the adjustment of present China's banking market. The government can relax the barrier to entry which will enhance the competition degree; it will be not only benefiting to the improvement of the efficiency, but also will be contributing for economic development.