Banking cost efficiency in China: an ownership and time series comparison

Abstract

This paper examines the ownership effect on Chinese banking cost efficiency over the period of 1998-2005. After controlling for loan quality, liquidity, capitalization and output mix, the empirical results suggest that there is a systematic difference in the cost efficiency between state-owned banks and joint-equity banks. Joint-equity banks are found to be less cost efficient, generally. Further analysis also was conducted for the unit interest cost, the unit labor cost and the unit cost of physical capital. The empirical analysis on the input mix (i.e. labor cost share) suggests that joint-equity banks prefer labor input in their banking production process. The time series analysis found that overall banking cost efficiency was improving from 1999 to 2002, but dropping from 2003 to 2005. This trend followed the variation in the per unit interest cost. The banking input mix (substitution between labor and physical capital) was found to be unrelated to the time series, indicating that a change was made in the production process of the Chinese banking industry during the period of 1998-2005.