China Research

Summary

After centuries of quiescence, the last two decades have witnessed very rapid economic growth in the world’s two most populous countries, China and India. Finance plays a crucial role in growth and in both economies the banks dominate the provision of external finance during the period of studied.

For China bond and equity market capitalisation was 26% and 45% respectively in 2002, compared to 115% and 137% for the US. In India, the comparable figures are 36% and 43%. The main aim of the paper is to look at recent productivity advances in Chinese and Indian banks.

First, this study focuses on trends in total factor productivity (TFP) changes in their banking sectors between 2000 and 2007; annual fluctuations are also examined. Second, the components of TFP growth are analysed, along with variations within and between the two countries, and across banks that differ in size, ownership, and listing characteristics. Third, we assess how closely estimates from non-parametric (Data Envelopment-DEA) and parametric (Stochastic Frontier-SFA) analyses concur and what this implies for their relative merits. Finally, we address the question of how TFP growth is related to standard measures of individual banks’ financial performance such as return on equity.

This study adds to knowledge by providing explicit comparisons of bank TFP growth in these two giant emerging markets. It brings more recent data into play: one advantage of looking at the period 2000-7 is that most major bank reforms have had a chance to “bed down” by this time. It is the first banking study outside the OECD area to compare and contrast the DEA and SFA approaches. It also adds to the literature by assessing the empirical relationship between TFP change and share prices.

The main findings are first, that TFP growth is largely driven by technical progress/innovation. It is somewhat faster in China than in India and strongest in large banks, though in China, there may be some deceleration with a shift in the underlying components. Second, the influence of ownership varies between the countries and listing is similarly ambiguous. Foreign banks display slower growth than locally owned banks in both countries. Third, for India, the period covering the early 2000s is found to be broadly in line with the aggregate TFP growth findings of most studies that covered the 1990s. Fourth, the Divisia (using SFA) and Malmquist (using DEA) TFP changes are not notably different in aggregate, but often generate pronounced differences in estimates of different components that drive TFP growth. Fifth, TFP advances are found to exert important influences on bank-specific equity prices.

JEL classification: G21, G28, D24
Keywords: productivity change, China, India, stochastic frontier; data envelopment analyses

Read more about the whole paper after its publication; we will get back to this issue.

 

 

 

 

 

 

Xiaoqing (Maggie) Fu
Associate Professor of Finance, Interim Associate Dean of Graduate School, Faculty of Business Administration, University of Macau

 

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