Analysis on the effects of government ownership on efficiency of Chinese commercial banks

Abstract

This study, targeting the data of 75 Chinese commercial banks (2003-2016), verified the effects of government ownership on efficiency of banks by applying stochastic frontier approach (SFA). The main results of the empirical analysis are as follows. First, as a result of the analysis using stochastic frontier model, high capital ratio, low loan-loss reserve ratio, and low cost to income ratio had positive effects on profitability of banks. Net loan ratio had positive effects on profitability of only joint-stock commercial banks (JSCBs). Second, as a result of verifying efficiency determinants of banks, low government ownership, listed banks, and high asset growth rate and operating profit per employee had positive effects on efficiency of banks. The study results indicate that the inflow of private capital into Chinese commercial banks lowers government ownership, improving governing structure and efficiency through enhancement of supervisory function.