Market power, strongstabilitystrong and performance in the Chinese banking.pdfVIP

Economic Issues, Vol. 18, Part 2, 2013 Market power, stability and performance in the Chinese banking industry Yong Tan and Christos Floros 1 ABSTRACT The recent financial crisis has led to a reduction in credit granted, a decreased volume of activity in international financial markets and an increase in risk-tak- ing behaviour. Several rounds of banking reforms in China have aimed to improve the efficiency, enhance the financial stability and decrease the market power of Chinese banks. The aim of this study is to investigate whether an increase in the risk-taking behaviour of Chinese banks increases market power; we also examine whether efficiency improvement enhances Chinese banks market power. Using data on 101 Chinese commercial banks over the period 2003-2011, our empirical results suggest that Chinese banks with higher vol- umes of non-traditional activities have lower market power, while the technical efficiency improvement of Chinese banks increases their market power. We find no significant evidence with regards to the impact of risk on market power. These results are highly recommended to bank managers and financial ana- lysts. 1. INTRODUCTION The banking industry plays an important role in the financial system and the economy as a whole. Due to the fact that China is the largest developing coun- try in the world, the stability of the banking industry, which is the most impor- tant part of the financial system, plays a vital role in Chinas economic devel- opment and provides an environment of economic stability for other Asian countries. Several rounds of banking reforms in China have sought to estab- lish a more competitive banking environment; the purpose of which