Bank ownership, privatization, and performance: Evidence from a transition country

- Partial privatization has improved bank performance in China.
- The minority foreign ownership has a positive long-run effect on performance.
- State ownership is associated with poor performance.
- We innovatively estimate interest income and non-interest income efficiencies.
- Commonly used bank-specific input prices distort cost/profit efficiency estimates.

This paper combines the static effect of ownership and the dynamic effect of privatization on bank performance in China over 1995-2010, reporting a significantly higher performance by private intermediaries - joint stock commercial banks and city commercial banks - relative to state-owned commercial banks. However, publicly traded banks, subject to multiple monitoring and vetting in capital markets, perform better regardless of ownership status. The privatization of banks has improved performance with respect to revenue inflow and efficiency gains in the short- or long-run (initial public offerings). The positive long-run effect is more relevant and significant for banking institutions with minority foreign ownership. Moreover, this paper innovatively estimates interest income efficiency and non-interest income efficiency at the same time. The results suggest that Chinese banks are much more efficient in generating interest income than raising non-interest revenue, although the latter aspect has improved significantly during the sample period.