Market Structure, Efficiency and Profitability: An Empirical Study on the Chinese Banking Industry 2007-2012

Since the economic reform was initiated in 1978, the Chinese banking sector has undergone significant changes, especially after the entry to the WTO in 2001 and shock by the global financial crisis in 2008. With the purpose of examining whether the recent Chinese banking sector is effective as well as suggesting future policy directions, this study investigates market structure, efficiency and profitability in the Chinese banking industry over 2007-2012. I firstly estimate X-efficiency and scale-efficiency for Chinese banks under the Stochastic Frontier Approach (SFA). Then, the relationship between profitability and market structure under the structure-performance hypothesis and the efficient-structure hypothesis was assessed. Our findings show that Chinese banking market is not supported by the traditional SCP or RMP hypothesis, but follow the ESS hypothesis