chapter  5
19 Pages

Cost-efficiency analysis in banking industries of ten Asian countries and regions

ByZHI SHEN, HAILIN LIAO AND THOMAS WEYMAN-JONES

Economic and financial reform in the 1980s brought China great progress in the transition from a planned economy to a market economy. During this transition, the Chinese banking system also experienced substantial reform and construction. The attempts and achievement of the banking system reform have been widely discussed in the literature (Garcia-Herrero et al., 2006; Liu et al., 2006; Allen et al., 2007) and numerous studies have investigated the performance of commercial banks by measuring the economic efficiency using nonparametric or parametric frontier modeling (Chen et al., 2005: Berger et al., 2007; Fu and Heffernan, 2007; Kumbhakar and Wang, 2007). However, the literature has not yet covered an examination of the competitiveness of Chinese commercial banks against foreign Asian banks from neighboring countries and regions. This research question is extremely important as, according to the rules and obligations set by the World Trade Organization (WTO) in December 2001, China is to gradually open its banking market. In December 2002, foreign banks were allowed to offer currency exchange services for Chinese customers, with limited RMB1 business for Chinese firms in December 2003. In December 2006, the Chinese domestic banking market was fully opened and foreign banks are now allowed to open their branches freely across the nation and offer financial services and RMB business to Chinese citizens. The easing of foreign entry barriers enhances the competitiveness of banking markets, with Chinese banks facing a strong challenge from foreign banks, which are well developed with superior management ability and advanced technologies. Our study is among the first to address this issue by measuring and comparing the cost-efficiency of commercial banks from ten Asian countries and regions with adoption of panel data stochastic frontier approaches.