Market structure, welfare, and banking reform in China

Abstract

This paper examines the effects of market reform on consumers and state commercial banks in China, a large developing country. I jointly estimate a system of differentiated product demand and pricing equations under alternative market structures. Overall, China’s banking reforms have achieved mixed results. Although there is a welfare gain from more consumers participating in the deposit market, the existing consumers suffer welfare losses because of declined service quality. The welfare effects are unevenly distributed, with losses skewed toward inland provinces and certain consumer groups. There is no clear evidence that the pricing of banking services has become more competitive after the reform, and such pricing remains subject to government intervention. Encouragingly, the price-cost margins of some state commercial banks have fallen over time.