Empirical Study On Relationship Between Market Structure And Performance Of China’s Banking Industry

Nowadays, with the rapid development of economic globalization and financial integration, as the core of modern economy, finance contributes to the economy more and more increasingly. As the core of finance, banks are the important agents of national macro-control, and the important means to achieve rapid and sustained and healthy development of national economy. The degree of competition between banks and monopoly affects on banks’performance, service quality and innovation. Therefore, the study on market structure and performance of banks in China has great significance to achieve effective competition in banking, improve the international competitiveness of banks and promote economic development. This has become a question of highly concen from academic and practice fields.In this paper, theoretical analysis and empirical analysis are combined. It makes analyses criteria of market structure of banks, and it calculates market share, market concentration ratio and Herfindahl Index through empirical analysis. It analyzes the performance of banks and its research methods and calculates the rate of profit, economic efficiency, technology efficiency, allocative efficiency, pure technology efficiency and scale efficiency of commercial banks. At the same time, it uses econometric methods, selecting China’s 14 commercial banks owning the largest market share as empirical research samples. Using the method of time series and cross section combined, and with Econometrics method, it carries on regression analysis of the relationship between the market structure and the performance from 1999 to 2008. In addition, it combines the new research methods of DEA, and analyses the efficiency of commercial banks in-depth. Of course, policy recommendations in this paper focus on the specification method, and at last it gives government’s industrial organization policies to improving the structure and performance of banks.Specifically, this paper is mainly reflected in the following areas. Firstly, it analyzes market structure of China’s banks. It introduces the theory model of market structure and the three stages of market structure of banks. It analyses market share in China’s banks, and it is found that state-owned banks still live in the main. From the industrial economy point of view, it analyzes market concentration of banks. Calculating by CR4 and HHI index, we find that the degree of concentration is still high in bank market in China in recent years, monopoly never changes substantively, and the entire market is still controlled by the four state-owned commercial banks. But with the dynamic and developed perspective, the new commercial banks generated in the market process have some impact on the pattern with a high concentration ratio, and the impact has strengthened competition in the banking sector. Market structure of China’s banks begins to shift from the high oligopoly to high concentration oligopoly, from the oligopoly to monopolistic competition, from high concentration to appropriate concentration. It also analyses product differentiation of banks, and it is found that product differentiation is smaller in China’s banks. It analyses economies of scale of commercial banks and found that the overall economy is economy of scale of commercial banks in China. But the state-owned commercial banks and joint-stock commercial banks show some differences in the economy state and development trends, state-owned commercial banks are worse than joint-stock commercial banks in economies of scale. It analyses entry and exit barriers to the commercial banks and it is found that policy barriers and legal barriers are the major barriers. Another study find the reason of oligopoly market structure of banks in China, including administrative monopoly, the property rights system, the bank’s property and the government development. The main reason is the existence of the administrative monopoly through transition process.Secondly, it analyses the performance of China’s banks. It analyzes the performance index which is used usually in abroad, Return On Asset (ROA) and Return On Equity (ROE), and it is found that the rate of profit is still low in China, but with the dynamic perspective, the rate of profit of commercial banks in China presents the variation tendency of rising after lowering, and the obvious division appears at the rate of profit among state-owned commercial banks and joint-stock commercial banks. With the DEA method, it calculates the overall efficiency of commercial banks in China from 1999 to 2008, and the specific allocative efficiency, technical efficiency, pure technical efficiency and scale efficiency change. It is fond that the overall efficiency of commercial banks is improved progressively, and the efficiency of joint-stock commercial banks is overall superior to state-owned commercial banks. It analyzes the reasons for the low performance of state-owned commercial banks, mainly oligopolistic market structure, diseconomies of scale, its management and external environmental factors.Thirdly, it examines the empirical relationship of market structure and performance of China’s banks. It uses the method of time series and cross section combined together, collects panel data from 1999 to 2008, selects the performance of commercial banks, namely, ROA, ROE and DEA efficiency value as the explained variable, and selects market concentration ratio, HHI index, GDP growth rate and capital and assets ratio as the explanatory variable. With Econometrics method, it carries on regression analysis of the relationship between the market structure and the performance from 1999 to 2008. The results show that the degree of market concentration and performance are negatively correlated, that is, the smaller the degree of market concentration, the higher the performance will be, GDP growth rate and performance are positively correlated, capital asset ratio and ROA are positively correlated and capital asset ratio and ROE are negatively correlated.Fourthly, it proposes the four industrial organization policies. They are relaxing government regulation and lowering barriers to entry and exit, supporting small and medium sized joint-stock commercial banks and expanding scale of operation and reforming regulatory system, improving governance and management of the four major state-owned banks, improving the laws and regulations, and at last improving overall performance.Compared with the previous literature, this paper has the following innovations. First, the new index, while appraising to the performance of banks with DEA to estimate efficiency value, we need to confirm rational input and output variable in advance, and it is important precondition to evaluate the efficiency of banks correctly. But up till now, the definition of output variable to banks still has greater difference in academic fields. In this paper, drawing lessons from domestic and international existing achievement and combining the characteristic of banks, it defines the output variable of banks as loan, profit and deposit We must know the input price while calculating the comprehensive efficiency of banks. In this paper, it selects bank operating expenses index as total labor compensation expense, i.e. isprice of labor; it selects one-year lending rate as the price of capital, i.e. interest rates. Second, the new variable, Return On Asset (ROA) and Return On Equity (ROE) is used usually in abroad as performance index, and in the regression as the dependent variable. This paper adds DEA efficiency value which is the performance index as dependent variable in order to investigate the management performance of banks overall. In this paper, with Econometrics method, it selects market concentration ratio, HHI index, GDP growth rate and capital and assets ratio as the explanatory variable and carries on regression analysis to the market structure and the performance. Third, the new idea, it uses regression analysis of econometric methods, and it is found that Herfindahl Index of banks and bank efficiency are negatively correlated. The higher the market concentration is, the lower the efficiency of banks is. I hope that the conclusion provides a new way of thinking for improvement of banks’performance.I hope that this paper studied market structure and performance of banks comprehensively and systematicly, and can help enrich and develop the theory of China’s banking system, expand and improve our banking field, and provide important reference views for China’s banking reform and financial policies.