Measure Competitive Conditions Of Chinese Commercial Banks With Panzar-Rosse Model

Since China’s admission to the World Trade Organization in2001, the financial market in China has embraced constant reform and opening up. The Chinese government and regulatory bodies have performed a series of reformative polices to improve banks’efficiency and competency. After decades of efforts, Chinese banks have become an important component in China’s macroeconomic reform and have supported the development of real economy. They have expanded capital and ameliorated business performance. They are now an important supporter for the national economic development. The Director of Board of Bank of Communications, Mr. Hu Huaibang, commented that the period from2003to2012as the "Golden Age" for the banking sector, when banks have developed rapidly and contributed significantly to allocating resource in the market.Since the establishment of China Banking Regulatory Commission in2003, the restriction on the entry into market of Chinese city banks and foreign banks was loosened and numerous city banks, rural banks and foreign banks entered the market. The diversity of participants in the banking sector has largely increased. At the same time, the asset share of four state-owned banks has been declining significantly since2003. All these mark the change of market overall structure in China’s banking sector. Under such context, the paper adopts Panzar-Rosse model to examine the competitive condition of20major Chinese commercial banks from2003-2012. The contribution made by the paper is listed as follows:First of all, the paper has made the2008financial crisis a breakpoint in the sample period to compare the H statistics of2003-2007and2008-2012, and to check the impact of the2008financial crisis on Chinese banking sector. Secondly, the paper has followed rigorous criteria in the selection of explanatory variables, which is the outcome of abundant researches into previous studies on the matter. In the end, the selection of variables in the paper was tested by alternative tests and the empirical results are proven to be robust. It once again proves the fitness of Panzar-Rosse model in the Chinese financial market and set a good example in variable selection. Finally, this paper also divides the sample banks according to asset scale to allow for the different performances of banks with different asset volume. The three groups are the big5commercial banks,9joint-stock banks and6city banks.The paper also provides some advice on the future development of commercial banks. With the trend of interest rate being decided by market factors, in order to maximize profit, commercial banks need to improve the quality of service to attract more clients. More importantly, they should discover more opportunities in the non-interest income sectors.