Does Good Financial Performance Mean Good Financial Intermediation in China?
IMF Working Papers, August 1, 2009
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Bibliographic details
- Authors: Tarhan Feyzioglu
- Published: August 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451873177.001
Main findings
- Chinese banks generate large profits and have relatively low nonperforming loans.
- Good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources.
- The results suggest that Chinese banks became more efficient during 2001-07.
- Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks.
- The paper finds no significant correlation between bank efficiency and profitability.
- Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies:
- low deposit interest rates
- large interest margins
- high market concentration
Efficiency analysis and methodology
- Approach: stochastic production frontier approach.
- Loan quality controls:
- focus on net loans
- corrections for nonperforming loans
- Sample design:
- Hong Kong SAR banks are included in the sample to have a more universally representative production frontier.
Scale, deposit behavior, and implications for reallocation
- Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale.
- Smaller banks operate at increasing returns to scale.
- Policy implication: reallocating deposits from large to smaller banks would increase overall efficiency.
Profitability versus intermediation efficiency
- No significant correlation found between bank efficiency and profitability.
- Large profits can coexist with wide-spread inefficiencies due to the factors listed above (low deposit rates, large margins, market concentration).
Policy recommendations and risks
- Move to indirect monetary policy.
- Deepen capital markets to channel some of the savings to productive investment.
- Note: deepening capital markets and shifting intermediation could spur loan growth, which will need to be handled with monetary policy and regulatory/supervisory tools.