Asset Diversification and Efficiency: Evidence from the Chinese Banking Sector

Abstract

We investigate the impact of earning asset diversification on Chinese bank efficiency from 2006 to 2011. To do so, we adapt the Simar and Wilson (2007) (Journal of Econometrics) approach to panel data context so that approach allows for technology change over time. Regression results reveal that increasing the asset share of other earning assets (including securities and derivatives) is positively associated with bank efficiency. Decreasing the share of nonearning assets in total assets or increasing total equity has a similar impact. Our results also suggest that financial reforms currently being undertaken in China, including removing the regulatory requirement concerning the ratio of loans to deposits (a new draft amendment to the existing commercial banking law) and interest rate liberalization (a proposed draft amendment), are likely to induce a significant positive effect on bank efficiency in China.