3. Banking Reform and Bank Performance in China

One main objective of banking reform in China is to improve bank performance so that the banking sector could allocate capital more efficiently. While three decades of reform give rise to a number of important research questions, this chapter addresses the following three issues: Has the banking reform been motivated by the agency theory and the budget constraint theory? Has the banking sector become more efficient? What impact has the privatization strategy had on bank efficiency? This chapter starts with an introduction of the efficiency concept and a brief literature review on bank efficiency in Sect. 3.1. After outlining research methodology in Sect. 3.2, this chapter empirically tests for whether banking reform strategies have been motivated by the agency theory and/or the budgetary constraint theory in Sect. 3.3. The privatization of state banks has been the focus of banking reform to alleviate the agency problem and to harden budget constraints aiming at improving bank efficiency. Partial privatization has led to significant changes in banking, and this chapter examines how concrete privatization strategies affect bank cost and profit efficiency in the short run and in the long run in Sect. 3.4. Section 3.5 concludes.