The performance of the Chinese banking system before and after the WTO entry

The purpose of this paper is to examine the effects of China’s accession to the World Trade Organization (WTO) in January 2002 on the efficiency levels, efficiency components (technological change and scale economy), and efficiency determinants of Chinese banks.

This study employs a two-stage stochastic frontier analysis to estimate efficiency and its components and identify the efficiency determinants.

Chinese banks did not benefit from technological change and scale expansion in reducing costs in the pre-WTO period, but the reverse occurred in the post-WTO period. Chinese banks benefited from technological change in increasing profits to a lower degree in the post than the pre-WTO period. Cost efficiency declined while profit efficiency improved after China’s accession. Security investments positively drove profit efficiency in both pre- and post-WTO periods. There was an efficiency gap between joint-stock banks and state-owned banks in the pre-WTO period, but this gap disappeared in the post-WTO period. Economic freedom was related negatively to cost efficiency and positively to profit efficiency in the pre-WTO period, but opposite relations occurred in the post-WTO period.

These findings appear to favour gradual liberalisation in the Chinese banking system, gradual removal of restrictions on foreign banks, certain shift from non-security investments to security investments, technology investment and scale expansion.

This is the first study investigating the impact of the WTO on the efficiency, technological progress, economy of scale and efficiency determinants in Chinese banks.