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Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.
Banks and banking --- China --- Economic conditions. --- Banks and Banking --- Money and Monetary Policy --- Industries: Financial Services --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Banking --- Finance --- Monetary economics --- Commercial banks --- Loans --- Nonperforming loans --- Bank credit --- Credit --- China, People's Republic of
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Motor vehicle driving --- Motor vehicles --- Rationing --- Environmental aspects
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What might interest rate liberalization do to intermediation and the cost of capital in China? China's most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.
Finance --- Business & Economics --- Banking --- Interest rates --- Monetary policy --- Government policy --- Money market rates --- Rate of interest --- Rates, Interest --- Interest --- Banks and Banking --- Industries: Financial Services --- Money and Monetary Policy --- Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection --- Interest Rates: Determination, Term Structure, and Effects --- Central Banks and Their Policies --- Information and Market Efficiency --- Event Studies --- General Financial Markets: Government Policy and Regulation --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary economics --- Deposit rates --- Interbank rates --- Loans --- Commercial banks --- Financial services --- Financial institutions --- Interest rate policy --- Banks and banking --- China, People's Republic of
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