Bank's Profit Efficiency Under China Economic Structure Rebalancing: Empirical Evidence Using Index of Economic Freedom

This present study argues that economic freedom is a necessary antecedent to China's structural economic rebalancing. Therefore, using an index of economic freedom, it seeks to examine the implications of economic rebalancing on banks' profit efficiency following a freer Chinese economy. O...

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Bibliographic Details
Published in:The Chinese economy 2018-01, Vol.51 (1), p.20-44
Main Authors: Yap, Woon Kan, Sufian, Fadzlan
Format: Article
Language:English
Subjects:
Aggregate demand
Banking
China
Commercial banks
Constraints
economic freedom
economic rebalancing
Economic structure
Efficiency
Freedoms
Government contracts
Government spending
Inflation
Ownership
Private sector
profit efficiency
stochastic frontier analysis
Tax rates
Taxation
Trade
Trade barriers
Trade policy
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Summary:This present study argues that economic freedom is a necessary antecedent to China's structural economic rebalancing. Therefore, using an index of economic freedom, it seeks to examine the implications of economic rebalancing on banks' profit efficiency following a freer Chinese economy. Our dataset includes an unbalanced panel of 514 annual observations from 138 commercial banks that operated from 2007 to 2013. This study found evidence that higher freedom index of government spending, which denotes contraction of government expenditure, will result in lower profit efficiency. However, on a more granular level, the reduction of efficiency does not apply to state-connected banks, which are seen to be more profit efficient. On the other hand, the reduction of profit efficiency that afflicts other commercial banks that are less connected to the state authority can be mitigated by the increased aggregate demand from the private sector, following greater fiscal freedom and trade freedom through cutback on the tax rates and lower trade barriers, respectively. In addition, save for state-owned commercial banks, lower monetary freedom is found to significantly increase profit efficiency across banks of all ownership types. This corroborates the fact that banks have more extensive capacity to anticipate inflation compared to depositors and thus, they are more likely to thrive in an inflationary environment.
ISSN:1097-1475
1558-0954
DOI:10.1080/10971475.2017.1368878