Banking Sector In China Research Articles

Learning Internal Controls from a Fraud Case at Bank of China

ABSTRACTThis case provides an opportunity to discuss principles of internal control, the process by which an entity's board of directors, management, and other personnel provide reasonable assurance that fraud and theft are prevented and detected. The case also facilitates discussion of the unique corporate governance and internal control environments in China, a fast-growing economy. Readers will be asked to apply the fraud triangle theory to identify internal control weaknesses and to design control activities for preventing fraud. The case is intended for beginning auditing students, but is also suitable for a more general audience such as accounting, management, and business students at the M.B.A. or undergraduate level.The case introduces Bank of China (BOC) against the backdrop of China's banking sector. It describes the proliferation of non-performing loans in Chinese banks, the failure to report these loans correctly, and the way in which these conditions create a climate where fraud and theft might be easily hidden. These problems and the need for internal controls become evident in the description of a major fraud scheme at BOC. After relating this scheme, the case concludes by reviewing recent reform initiatives to modernize internal controls in Chinese banks.

China’s banking system, market structure, and competitive conditions

This paper presents an empirical assessment of the market structure and the competitive conditions of the Chinese banking sector. We applied the Panzar-Rosse H-statistic on the data collected from a panel including 16 most significant Chinese banks for the period 2004–2007. Equilibrium tests and the competitive conditions tests were applied on the data. From the pooled regression in the whole period, we found that the banking sector in China for 2004–2007 was monopolistically competitive. We also show that the Chinese banks were not able to achieve high records of profitability in monopolistically competitive markets.

The impact of risk on banks' Total Factor Productivity Change: empirical evidence from the Chinese banking sector

The paper employs the Malmquist Productivity Index (MPI) method to analyse the impact of risks on China banks' total factor productivity. The results indicate that the China banking sector has exhibited a lower Total Factor Productivity Change (TFPCH) with the inclusion of risk factor. The Joint Stock Commercial Banks (JSCBs) and City Commercial Banks (CCBs) have exhibited lower TFPCH owing to Technological Change (TECHCH), while the State Owned Commercial Banks (SOCBs) have exhibited lower TFPCH owing to Technical Efficiency Change (EFFCH).

State Aid and Competition in Banking: The Case of China in the Late Nineties

Many contributions to the literature on competition in banking use the Panzar and Rosse test (1987). This test encompasses a variety of market outcomes assuming firms maximize profits. However, when applied to the banking industry, this assumption may not be always valid as banks sometimes may carry social objectives or aim to be systemic players so as to be too big to fail. This then motivates different objective functions, departing from profit maximization. We present a reduced form model where banks can pursue other goals than profit maximization. This allows us to test for behavioral changes of banks over time. Our model provides a framework to evaluate whether moral hazard issues may plague banks receiving state aid, which concerns greatly the recent debate on government intervention in financial markets during the global financial crisis in 2008. To test the impact of state aid, we examine a natural experiment in the banking sector in China in the 1990s. We cannot reject that the possibility of receiving state aid triggers moral hazard prone conduct.

The impact of risk on technical and scale efficiency: empirical evidence from the China banking sector

By employing the data envelopment analysis (DEA) method, this paper examines the impact of risks on China banks' technical and scale efficiency estimates. To do so, we follow the procedures set out by Drake and Hall (2003) to include risk factor as a non-discretionary input variable. The results indicate that scale inefficiency outweighs pure technical inefficiency in determining the China banking sector's technical efficiency during the earlier years, while the opposite is true during the latter years. The empirical findings suggest that potential economies of scale to be overestimated in the range of 10% to 22.5% when risk factor is excluded. The inclusion of risk factor has benefited the city commercial banks the most, while the joint stock commercial banks the least. The findings from the multivariate regression analysis indicate that technically efficient banks are larger, relatively better capitalised, have smaller market share and on average have lower amount non-performing loans.

Productivity, efficiency and technological change in banking: empirical evidence from the Chinese banking sector

By applying the non-parametric Malmquist Productivity Index method, this paper attempts to investigate the sources of productivity changes of China's State-Owned and Joint-Stock Commercial Banks (JSCBs) during the period 2000–2005. The empirical findings suggest that the China's banking sector has exhibited productivity progress attributed to the increase in efficiency. The empirical findings suggest that the State-Owned and the JSCBs have exhibited productivity progress of 5.9% and 0.3%, respectively. The second stage multivariate regression results suggest that profitability, income diversification, capitalisation and loan intensity leads to a higher level of total factor productivity, technological change and efficiency, while risk is negatively related to the banks' technological change levels.

Determinants of Bank Profitability in a Developing Economy: Empirical Evidence from the China Banking Sector

The Chinese banking sector has undergone noteworthy financial reforms, which significantly metamorphosed the banking system. This article seeks to examine the determinants of the profitability of the Chinese banking sector. The empirical analysis is confined to the four State Owned Commercial Banks (SOCBs) and the 12 Joint Stock Commercial Banks (JSCBs) during the postreform period of 2000–2007. The empirical findings of this study suggest that size, credit risk, and capitalization are positively related to the profitability of China banks, whereas liquidity, overhead costs, and network embeddedness have negative impacts. However, the impact of liquidity is not uniform across bank types. We find that the SOCBs with higher level of liquidity tend to be relatively more profitable, which could be vindicated by the significant amount of lending to the State Owned Enterprises. The impact of economic growth and inflation are always positive whether we examine the SOCB or the JSCB.

Foreign Ownership and the Risk Behavior of Chinese Banks: Do Foreign Strategic Investors Matter?

Great credit risk is a big headache which blocks the development of the banking sector of China. Based on the panel data of the Chinese banking sector from 2002 to 2006, this paper empirically examines the effects of foreign strategic investors’ participation on the risk behavior of Chinese banks. The results show that foreign strategic investors (FSI) had a positive, but limited impact on the credit risk of Chinese banks. Further analysis reveals that the risk management abilities of Chinese banks have improved apparently when the proportion of shareholding of the leading foreign strategic investors exceeds 15 percent, which results in a significant drop of the credit risk. However, due to the ‘minority ownership’ restriction on foreign investors' stock shares, the positive effect of the participation of foreign strategic investors is limited. The visible decline in both non-performing loans (NPLs) and the NPL ratio of Chinese banks mainly reflects the rapid growth of China's economy and benefits a lot from the massive financial restructuring of state-owned banks.

Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector

This paper seeks to examine the determinants of the profitability of the Chinese banking sector during the post-reform period of 2000–2005. The empirical findings from this study suggest that all the determinants variables have statistically significant impact on China banks profitability. However, the impacts are not uniform across bank types. We find that liquidity, credit risk, and capitalization have positive impacts on the state owned commercial banks (SOCBs) profitability, while the impact of cost is negative. Similar to their SOCB counterparts, we find that joint stock commercial banks (JSCB) with higher credit risk tend to be more profitable, while higher cost results in a lower JSCB profitability levels. During the period under study, the empirical findings suggest that size and cost results in a lower city commercial banks (CITY) profitability, while the more diversified and relatively better capitalized CITY tend to exhibit higher profitability levels. The impact of economic growth is positive, while growth in money supply is negatively related to the SOCB and CITY profitability levels.

Antecedents of Total Factor Productivity Change: Empirical Evidence from the Chinese Banking Sector

By applying the non-parametric Malmquist Productivity Index (MPI) method, this paper attempts to investigate the sources of productivity changes of China’s State Owned Commercial Banks (SOCBs) and Joint Stock Commercial Banks (JSCBs) during the period 2000–2005. The empirical findings suggest that the China banking sector has exhibited productivity progress attributed to the increase in efficiency. The empirical findings suggest that the SOCBs and the JSCBs have exhibited productivity progress of 0.2 and 1.3%, respectively.

Non-traditional activities and bank efficiency: empirical evidence from the Chinese banking sector during the post-reform period

This paper examines the impact of non-traditional activities on the China banking sector's technical and scale efficiency during the post-reform period 2000-2005. The paper follows the procedures set by Isik and Hassan (2003) by omitting the off-balance sheet items first, before adding it as an additional output variable in the analysis. The empirical findings suggest that the State Owned Commercial Banks' technical efficiency are enhanced attributed to improvement in scale efficiency, the Joint Stock Commercial Banks have exhibited a higher levels of technical efficiency attributed to improvement in pure technical efficiency.

Efficiency amongst China's banks: a DEA analysis five years after WTO entry

WTO entry in 2001 heralded a new stage in the reform of China's banking sector. With the reality that foreign banks would be extended national treatment by the end of 2006, China's banks faced the imperative to reform in earnest. They began reforms from a variety of different starting points and have pursued a variety of different reform approaches. Five years on, this paper assesses efficiency levels in 11 of China's most prominent banks. The results, obtained using Data Envelopment Analysis (DEA), suggest that differences in efficiency levels are actually quite small. On the one hand, this finding is encouraging because it suggests that few of China's major banks lag behind the pack. On the other hand, it also implies that efficiency levels almost certainly do lag in China's less prominent banks, which together still account for more than 40% of total banking system assets.

Sources of Total Factor Productivity Change

By applying the non-parametric Malmquist Productivity Index (MPI) method, this paper attempts to investigate the sources of productivity change in China's State-Owned Commercial Banks (SOCBs) and Joint-Stock Commercial Banks (JSCBs) between 2000 and 2005. The empirical findings suggest that productivity has progressed in China's banking sector, which can be attributed to an increase in efficiency.

Economies of scale and scope in China's banking sector

Employing the stochastic frontier approach and expansion path measures, this article estimates economies of scale and scope in China's banking sector during the period 1985 to 2002. The objective is to assess whether different ownership types and banking reforms affect economies of scale and scope. The traditional nonfrontier approach and the standard measures are also applied for comparison and completeness. The results indicate the presence of constant returns to scale and significant economies of scope for most joint stock banks throughout the period, and for state-owned banks in the later part of period, following a second set of bank reforms. There is evidence that use of the traditional nonfrontier model biases the measures of scale and scope economies.

Banking on China's WTO Commitments: 'Same Bed, Different Dreams' in China's Financial Services Sector

Foreign banks and the Chinese Government have different dreams about the business opportunities and obligations that arise under China's World Trade Organization (WTO) commitments on financial services. This article provides an overview of China's banking sector reforms and its gradual opening to foreign participation in the context of General Agreement on Trade in Services (GATS) rules governing international trade in financial services and the obligations that apply since China's WTO accession in December 2001. The article highlights the contradictory interpretations that China and other Members have issued regarding China's GATS commitments and provides a framework for assessing the WTO consistency of China's banking measures. An analysis is conducted under this framework to evaluate whether China has fully implemented its GATS commitments on (i) the acquisition of Chinese banks by foreign financial institutions, (ii) legitimate ‘prudential regulation’ in the banking sector, and (iii) full market access for credit card and electronic payment services. Notwithstanding the apparent complexity of GATS rules, the article concludes that the WTO legal framework supports the case for increased access to China's financial services market consistent with its GATS commitments, and fully consistent with China's plans for continuing domestic growth and its medium-term financial services export interests.

Cost X-efficiency in China's banking sector

Abstract Employing the stochastic frontier approach, this paper investigates cost X-efficiency in China's banking sector over the period 1985–2002. The objective is to assess whether different ownership types and banking reforms affect X-efficiency. A two-stage regression model is estimated to identify the significant variables influencing X-efficiency. Overall, the results show that banks are operating 40–60% below the X-efficiency frontier. On average, the joint-stock banks are found to be more X-efficient than the state-owned commercial banks, but individual scores present a far more complex picture. It appears that X-efficiency was higher during the first phase of bank reform. Recent policies aimed at increased privatisation, greater foreign bank participation, and liberalised interest rates should help to improve the cost X-efficiency of China's banks.

Cost X-Efficiency in China's Banking Sector

Employing the stochastic frontier approach, this paper investigates cost X-efficiency in China's banking sector over the period 1985-2002. The objective is to assess whether different ownership types and banking reforms affect X-efficiency. A two-stage regression model is estimated to identify the significant variables influencing X-efficiency. The results show that on average, banks are operating 50-60% below the X-efficiency frontier. The jointstock banks are found to be more X-efficient than the state-owned commercial banks, and it appears that X-efficiency was higher during the first phase of bank reform.

Progress in China's Banking Sector Reform: Has Bank Behavior Changed?

Substantial effort has been devoted to reforming China's banking system in recent years. The authorities recapitalized three large state-owned banks, introduced new governance structures, and brought in foreign strategic investors. However, it remains unclear the extent to which currently reported data reflect the true credit risk in loan portfolios and whether lending decisions have started to be taken on a commercial basis. We examine lending growth, credit pricing, and regional patterns in lending from 1997 through 2004 to look for evidence of changing behavior of the large state-owned commercial banks (SCBs). We find that the SCBs have slowed down credit expansion, but that the pricing of credit risk remains undifferentiated and banks do not appear to take enterprise profitability into account when making lending decisions. Controlling for several factors, we find that large SCBs have continued to lose market share to other financial institutions in provinces with more profitable enterprises. The full impact of the most recent reforms will become clear only in several years, however, and these issues should be revisited in future research.

Biased Lending and Non-performing Loans in China's Banking Sector

This article uses a panel data set of public listing companies in China empirically to explore the relationship between banks' lending behaviour and non-performing loans. Our results show that state-owned enterprises (SOEs) got more loans than other firms, other things being equal, and SOEs with high default risks were able to borrow more than the low-risk SOEs and non-SOEs. This suggests that Chinese banks had a systemic lending bias in favour of SOEs, particularly those with high default risks, during the period under investigation. The causes and implications of this behaviour are discussed.

Banking Reform in China: Catalyzing the Nation's Financial Future

In 2003 China posted its highest economic growth rate in seven years, a robust 9.1 percent. Today the nation's gross domestic product (GDP) dwarfs by more than eight fold its level of 1978, the year China began taking its first tentative steps away from a centrally-planned communist economy towards a mixed socialist-market system. According to the World Bank, market reforms in China and the growth they have stimulated helped lift more than 250 million people from poverty (roughly equivalent to positively transforming the lives of the combined populations of England, France, Germany, and Italy). In 2003 China's per capita GDP surpassed the $1,000 mark for the first time in history. The greatest and most fundamental undertaking for China's financial reform over the coming years undeniably will occur in the banking sector. As with the situation throughout East Asia, businesses in China typically obtain external financing from banks rather than through the issuance of securities. Yet banking in China represents a glaringly fragile component in its economy. Poor lending policies of the past have produced a massive deadweight of nonperforming loans (NPLs). This article argues that investors and policy makers, while right to be concerned, would be patently wrong to ignore the tremendous upsides that should accompany China's banking reforms. Although now a soft spot in the Chinese economy, we contend that China's banking sector has the momentum and potential not only to be restored to health, but to play a catalytic role as a stimulant to further and sustained growth.