State Ownership, Foreign Minority Shareholders, and the Efficiency of Chinese Commercial Banks

Abstract

In this paper, we estimate the technical and allocative efficiency of Chinese commercial banks using both the stochastic frontier analysis primal system, a parametric method, and minimum convex input requirement set, a nonparametric approach. The effects of state ownership and the introduction of foreign minority shareholders (IFMS) on these two types of efficiency measures are also studied. Under both sets of efficiency estimations, the empirical results consistently show that state ownership has no significant effect on the allocative efficiency of Chinese commercial banks, and no significant negative influence on the technical efficiency of these banks. IFMS helps Chinese commercial banks to eliminate the constraints from some ossified institutions and optimize input combinations. These effects significantly enhance allocative efficiency, but exert no considerable influence on technical efficiency.