Evaluating the effectiveness of China's financial reform-The efficiency of China's domestic banks

- We evaluate the efficiency of China's domestic banks using foreign banks as the benchmark.
- The cost advantage of foreign banks is caught up due to competitive pressure.
- Domestic banks enjoy wider profit advantage because of institutional arrangements, cultural and social networks, profit scope economy and revenue scale economy.

This paper estimates the cost and profit efficiency of the Chinese domestic banking sector to evaluate the effectiveness of China's financial reforms since 1978. We use the performance of foreign banks as the benchmark because foreign banks, subject to intensive worldwide competition, are perceived as possessing superior governing structure and organization, more advanced technologies and better trained labor force. On the other hand, competition in China's banking sector is mainly in the form of nonprice measures, thus putting foreign banks at a disadvantage. We find domestic banks have gradually caught up the cost advantage of foreign banks in a manner consistent with the increased competitive pressure. On the other hand, the profit advantage of domestic banks over foreign banks is widening because of institutional arrangements, cultural and social networks as well as the profit scope and revenue scale economy.