Market power, stability and performance in the Chinese banking industry

The recent financial crisis has led to a reduction in credit granted, a decreased volume of activity in international financial markets and an increase in risk-taking behaviour. Several rounds of banking reforms in China have aimed to improve the efficiency, enhance the financial stability and decrease the market power of Chinese banks. The aim of this study is to investigate whether an increase in the risk-taking behaviour of Chinese banks increases market power; we also examine whether efficiency improvement enhances Chinese banks' market power. Using data on 101 Chinese commercial banks over the period 2003-2011, our empirical results suggest that Chinese banks with higher volumes of non-traditional activities have lower market power, while the technical efficiency improvement of Chinese banks increases their market power. We find no significant evidence with regards to the impact of risk on market power. These results are highly recommended to bank managers and financial analysts.