Market power, stability and performance in the Chinese banking industry

Abstract

The recent financial crisis signifies a reduction of credit granted, a decreased volume of activity in international markets and an increase of risk-taking behavior. 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 behavior of Chinese banks increases the market power; we also examine whether the efficiency improvement enhances Chinese banks’ market power. Using 101 Chinese commercial banks over the period 2003-2011, our empirical results suggest that Chinese banks with higher volumes of non-traditional activities have lower market power, while technical efficiency improvement of Chinese banks increases banks’ 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 analysts.

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