World financial crisis has caused some of the world top banks like Citigroup and Royal Bank of Scotland (RBS) to collapse but surprisingly, there are three state-owned commercial banks in China managed to avoid the destruction and emerged to become the three largest commercial banks in the world. China's banking reforms that were conveyed from 1998 in preparation for China's entry into World Trade Organization (WTO) helped China to escape from the world financial crisis. The most recent reform aimed at ownership diversification because reformers presume that tightened corporate governance, better budget control and privatization are ultimate ways to improve efficiency. There are two major strategies of privatization which are foreign acquisition and stock listing. The Chinese listed state-owned banks turned out to be the least affected by the financial crisis due to the risk-averse nature of Initial Public Offering (IPO).
The banking sector has undergone fundamental structural changes since the economic reform in 1978. The Chinese banking system reform could be divided into four stages. The initial stage saw the establishment of a two-tiered banking system. These specialized banks were lending mechanism of the government, where financial support was provided to Special Operations Executives. The second stage was defined by further market reform and the establishment of three national policy banks. The policy banks take away the policy lending activities and focus on commercial lending activities only. There is also development of smaller Joint Equity Banks during this period. Major events during third stage of the reform process are reorganization of People's Bank of China, restructuring of some urban cooperatives into City Commercial Banks, establishment of four Asset Management Companies and the first round of Non-Performing Loans disposal. The final stage encourages foreign acquisition and participation. Chinese state-owned banks began to be listed on the stock market with a healthier balance sheet. Besides that, there is also listing of some Joint Equity Banks during this period.
In the recent years, the amount of non-performing loans of the state-owned banks decreased significantly after a series of state supports. The profitability of the major Chinese commercial banks had improved. Stocks of the banking sector became attractive when they were listed on the stock exchanges due to a cleaned balance sheet and intensified income-generating ability. Under the pressure of increased globalization, the banks need to strengthen their risk resistance ability while expanding their income-generating operations.
According to Chen et al. (2005), they concluded that after a series of reforms, the overall efficiency of the Chinese commercial banks had been improved substantially. Joint Equity Banks were more efficient than their state-owned counterparts. Wei and Wang (2000) stated that using the frontier measurements, most of the studies identified that the Chinese commercial banks were technically inefficient, though the efficiency level had improved over the years. Chen et al. (2005) concluded that the financial deregulation of the mid-1990s improved cost efficiency significantly. Garcia-Herrero and Santabarbara (2008) identified that when the foreign bank acted as a strategic investor, its positive effect on bank performance was more obvious than compared with purely financial investors. A recent study by Lin and Zhang (2009) identified that banks which had listed recorded better pre-event performance than those which had not.
The parametric approaches presume the shape of the frontier, making it difficult to divide the estimated inefficiency from specification errors. The nonparametric methods which eliminate the influence of random errors are also subject to criticism. The nonparametric approach, Data Envelopment Analysis (DEA) was applied in this study due to the fact that price information, like salary of the employees of Chinese commercial banks is hardly achievable. Data Envelopment Analysis (DEA) is a nonparametric linear programming technique which provides a new way of efficiency measurement. The relative efficiency of a particular Decision-Making Unit (DMU) could be calculated by computing the ratio of outputs and inputs. The efficiency of each Decision-Making Unit can be determined by the maximum of the ratio of weighted outputs to weighted inputs subject to the condition that the virtual output to input ratio of every Decision-Making Unit, including itself, must not exceed unity. There is a problem occurred in the equation where the solution it generated is infinite. So, Charnes et al.(1978) added one more constraint and solved the equation by its 'dual'; the envelop-formed model. However, there is a weakness of Data Envelopment Analysis, which it could grant many Decision-Making Units (DMUs) the highest level of efficiency simultaneously if the size of the sample is not large enough compared with the number of input and output variables.
The data in this study were extracted from Bankscope, which consist of a panel of 14 listed Chinese commercial banks from 1999 to 2008. There is also additional data derived from other sources like Chinese Statistical Yearbook (NBU, 1999-2009), Almanac of China's Finance and Banking 1999-2007, websites of People's Bank of China and China Banking Regulatory Commission (CBRC), and annual reports of banks.
The banking efficiency in China has been improved after the stock listing. After listing, the state will not be bind to bail out failing state-owned banks, but also helps bank comprehend their scale economy through raising capital from investors. Initial Public Offering (IPO) sticks out to be a substantial and significant factor. Privatization through stock listing has proved to be effective in improving banks' efficiency. The relative strength of the Chinese banks was a great hope for the Chinese and the world economy during the crisis.
