Measuring bank competition under binding interest rate regulation: the case of China |
| |
Authors: | Bing Xu Michiel van Leuvensteijn |
| |
Institution: | 1. Universidad Carlos III de Madrid, Getafe, Spain;2. Corporate Strategy &3. Policy, All Pensions Group (APG), Amsterdam, The Netherlands |
| |
Abstract: | Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition have concluded that bank competition in China declined during the past decade, despite progressive reforms implemented since the 1980s. We show that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar–Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the profit elasticity (PE) approach does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996–2008, we show that competition actually increased in the past decade when the PE indicator is used. |
| |
Keywords: | Competition banking industry China lending markets regulation |
|
|